The objective of this Financial Reporting Standard (NIF) is to establish the valuation, presentation and disclosure standards for the initial and subsequent recognition of inventories in the statement of financial position of an economic entity.
standard-financial-information-nif-c-4-inventories-presentationReasons for issuing this standard
Considering its objective of convergence with the International Financial Reporting Standards (IFRS or IFRS) of the
International Accounting Standards Board
(IASB), the Mexican Financial Reporting Standards Council (CINIF) considered it convenient to replace Bulletin C-4 with a Financial Reporting Standard (NIF) on inventories in which the standards established in the current International Accounting Standard IAS would be adopted. -2 Inventories.
Main changes
They are eliminated:
a) Direct costing as a valuation system. The direct costing system requires that the production cost be determined taking into account only the variable manufacturing costs
(they vary in relation to the production volume). Fixed manufacturing costs are excluded from the cost of production and are included in the results of the period in which they are incurred. NIF C-4 establishes that the cost of production of inventories must include, without exception, all costs of purchase, conversion and all other costs and expenses incurred to put the inventories in their present condition, to be of according to the definition of acquisition cost.
b) The formula (formerly the valuation method) for allocating the cost of inventories called last-in-first-out (“LIFO”). This formula assumes that the costs of the last items to enter warehouse or production are the first to leave. By applying this formula, inventories at the end of the year are recognized at the oldest acquisition or production prices, while costs are more current in the income statement.
Valuation standards
Bulletin C-4 established that, under certain circumstances, the cost of inventories will be modified on the basis of the «Cost or market value, whichever is less, except that: (1) the market value must not exceed the value and that (2) the market value must not be less than the net realizable value. " NIF C-4 establishes that this modification must be made only on the basis of the net realizable value.
Types of inventories not covered by NIF C-4
NIF C-4 establishes the types of inventories that are out of its scope (Construction, Financial and Primary Sector) as well as those that are only exempted from its valuation requirements but which are subject to the other requirements established in this standard.
Inventory acquisitions, forward
NIF C-4 requires that in the cases of inventory acquisitions through installment payments, the difference between the purchase price under normal credit conditions and the amount paid must be recognized as financial cost during the financing period, according to the provisions in NIF D-6, Capitalization of comprehensive financing result, which establishes that the RIF should not be capitalized on inventories that are routinely manufactured or produced during a short period. Bulletin C-4 made no reference to this situation.
Special circumstances that should not affect the cost of production
- Abnormal amounts of waste of raw materials, materials, labor and other production costs (initial period of operations, manufacture of a new product, lack of adjustment of machinery and inexperience) Storage costs, unless these are necessary in the production process Administration expenses that do not contribute to putting the inventories in their current condition Selling expenses
Estimates for impairment losses
NIF C-4 allows that, in certain circumstances, the estimates for impairment losses of inventories that have been recognized in a previous period, are reduced or canceled against the results of the period in which these modifications occur. This procedure was not established in Bulletin C-4.
Revelations
NIF C-4 requires that, where appropriate, the amount of inventories recognized in profit or loss during the period be disclosed, when other items are included in cost of sales or when a part of cost of sales is included as part of the discontinued operations or when the income statement is presented classified according to the nature of the items that comprise it and a cost of sales item is not presented, but the items that comprise it are presented in different items.
The provisions of NIF C-4 require the disclosure of the amount of any loss due to impairment of inventories recognized as cost in the period. This disclosure was not required in Bulletin C-4.
Accounting change
NIF C-4 requires that a formula change (previously method) for the allocation of the cost of inventories be treated as an accounting change, based on NIF B-1, Accounting changes and error corrections. Bulletin C-4 did not establish whether that change should be treated as a change in a particular standard or in an accounting estimate.
Advances to suppliers
Bulletin C-4 established that entities that made disbursements for advances to suppliers should “… register them within the general chapter of inventories in a specific account,…” NIF C-4 requires that items whose risks be recognized as inventories and benefits have already been transferred to the entity; therefore, it should be understood that advance payments are not part of inventories.
PRESENTATION RULES
The presentation in the statement of financial position of the inventories net of the estimates created on them must be made classifying them as members of the short-term assets (current) unless, due to the nature of the operations of the entity, it considers Inventories that will be sold or used after twelve months from the date of the statement of financial position or within a period that exceeds the normal cycle of operations of the entity, as the case may be.
