This guide is indicative and includes a summary of the most important considerations related to the application of International Financial Reporting Standards (IFRS) approved in the Kingdom of Saudi Arabia. The manual has been prepared based on International Financial Reporting Standards approved in the Kingdom of Saudi Arabia (issued in 2020 AD). When measuring such inventory at fair value less costs to sell, changes in fair value less costs to sell are recognized in profit or loss in the period of the change.
However, the objective of the fair value measurement is the same in both cases: Estimate the price at which a transaction would take place under normal arm's length conditions to sell the asset, or transfer the liability between market participants at the measurement date below the current market. conditions (ie the exit price on the measurement date from the perspective of a market participant who holds the asset or owes the liability). When there is no observable price for a corresponding asset or liability, the entity measures fair value using another valuation technique that maximizes the use of appropriate observable inputs and minimizes the use of unobservable inputs. Since the fair value measurement is market-based, it will be measured by the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk.
As a result, the entity's intention to hold an asset, meet a liability or otherwise discharge it is not relevant in the fair value measurement. The definition of fair value focuses on assets and liabilities; because they are the main subject of accounting measurement. In addition, this standard must be applied to the company's own equity instruments that are measured at fair value.
Disclosure of assets for which the recoverable amount is fair value less disposal costs.
Recognition and Measurement Requirements
IAS No. 2 “Inventories”
- Basic principle
Value 4.1.2 Costing Methods
- Cost Components
- International Accounting Standard (16)
- Initial and Subsequent Expenses
- Depreciable amount and Remaining Values
- Revaluation Model
- IFRS No. (13)
- About Fair Value Hierarchy
- Overview
- How do we conduct market-based measurement?
- Impact of Transition to IAS 2 on the Zakat Base
- Introduction
- Impact of Transition to IAS 16 on the Zakat Base
The purchase price of goods purchased for resale or of raw materials used in the production process. Any discounts or rebates must be deducted from the costs. In the case of a production or conversion process, direct production costs and direct labor plus the systematic allocation of fixed costs (costs that will be incurred regardless of the production level) and variable costs (costs determined on the basis of the production level) are included in the costs. Other costs incurred in bringing inventory to its current location and condition. For example, it may be appropriate to include non-manufacturing overhead costs, or design costs for customer products identified in inventory costs.
Storage costs, unless these costs are necessary in the production process before another stage of production. This recognition principle will apply to all costs in the period in which they are accrued. Costs incurred, mainly, for the purchase or construction in the item of real estate, plant and equipment.
To disassemble and remove the asset and restore the location where the asset is located. Debit equity through other comprehensive income - to reflect increase in revaluation surplus. The change in the book value of the asset as a result of the revaluation should be treated in the following way:
In addition to a Level 1 market that is observable for the asset or liability, directly or indirectly, Level 2 inputs include:. It is used to measure fair value to the extent that there are no suitable observable inputs, allowing for situations in which there is little, if any, activity in the market for the asset or liability at the measurement date. A quoted market price in an active market provides the most reliable evidence of fair value. value and is invariably used to measure fair value when possible.
At fair value. costs refer to bringing the asset to the required location and condition. so that it can function in the manner intended by. of the asset to the recoverable one. In all cases, in relation to the remaining elements of the Zakat base, such as additions and deductions, the stock of goods at the end of the period recognized in the financial statements is considered among current assets. These assets are not allowed to be deducted from the Zakat base and which are not defined in Article Five of the Regulation in the context of deductions from the Zakat base.
In cases where the inventory is considered to be part of the components of the deductible asset (such as spare parts not intended for sale), this will not affect the Zakat base, as the aforementioned inventory is inherently deducted from the Zakat base pursuant to Article Five. Instead, it will be consumed as part of the asset and deducted by the book value.
Introduction
The third and tenth paragraph of Article Four
- ZB Financial Impact of the Transition
- Proposed Zakat Base Financial Implications Handling
- Impact of Transition to IFRS 13 on the Zakat Base
- Theoretical Examples on the Effect of Transition on ZB
- International Accounting Standard 16
- International Accounting Standard 2
- Calculating the cost of sales for the year 2018 according to the first-in, first-out method
- End-of-period inventory value according to the first-in, first-out method
- Calculating the weighted average per unit
- Calculating the cost of sales for the year according to the first-in, first-out method
Impairment losses: The decrease in the value of the asset does not affect the Zakat base when taking into account the impairment loss recognized in the profits and losses as expenses for the deduction in accordance with the sixth paragraph of Article Six in the executive regulations for the collection of Zakat, and at the same time the asset is deducted from the book value after deducting the impairment loss. This standard mainly refers to the methodology used for the measurement of fair value by defining and adopting a single framework for its measurement, in addition to the disclosures in the financial statements about the measurement of fair value. By referring to the details covered by the standard, it is noted that it does not measure the financial impact on the items of the financial statements, but rather establishes a framework for measuring the fair value of items included in other separate accounting standards, taking into account the exceptions specified in the standard.
Referring to the standard sections in this manual, the fair value measurement of the above items and how to deal with the zakat effect, if any, was covered. The book value of SAR 25,000 has been compared with the revalued amount of SAR 48,000 and the difference of SAR 23,000 has been recognized in equity under the item (revaluation surplus). Transfer from the revaluation surplus account to retained earnings upon sale of the asset as a result of the accounting entry.
It should be noted that the end result is a reduction in the zakat base resulting from the increase in the value of the asset due to the revaluation and the increase in depreciation costs over the life remaining after the revaluation. According to the above summary of operations, it should be noted that the results of the revaluation influenced the increase in the value of the asset, deducted from the base and depreciation value. Handling the impact: Adding the revaluation surplus balance to the zakat base to offset the impact.
Balance of provision for dismantling and removal = balance as at the end of the previous year (retained balance. The impact on the zakat base is on taxpayers who use the last-in, first-out method, and after switching to using other methods, which in most cases will result in a reduction in cost of goods sold, which inversely affects the profit subject to zakat (reducing if other methods are used) Determine the net realizable value of the inventory and the amount of the loss from inventory decline.
Referring to the results of the application and after reducing the value of the stock at the end of the period and recognizing the decrease loss, the question arises as to the extent to which this loss is a deductible expense for the purposes of Zakat be considered. Referring to the treatment of the new standard and mentioning it expressly for the accounting treatment, the requirement of the standard for the calculation of the net realizable value is mainly based on the selling price in the market minus the estimated costs of the selling process, i.e. the company sold the inventory immediately in the subsequent period, then the goods will be sold at the same calculated value (realizable value). For example, in the previous example, the inventory was reduced to 55,000, and the selling price was also SAR 55,000, that is, the selling amount is equal to the cost in the subsequent period, and no additional loss will be recognized since the loss is recognized is in the previous period.
In light of the above, it can be concluded that the losses recognized in the previous period are a realizable loss for the purpose of zakat. Noting that, the common practice before the transition was to value the inventory in the same way as after the transition.
