Inventory in the public sector rarely looks like a shop’s stockroom. It is military stores, strategic fuel reserves, unissued postal stamps, drugs in a hospital pharmacy, spare parts for plant and equipment, training materials, and land held for sale. IPSAS 12 gives one set of rules for all of it: how to measure it, when to write it down, and when it becomes an expense.
1.What IPSAS 12 coversIPSAS 12.1
The objective of IPSAS 12 is to prescribe the accounting treatment for inventories — principally, how much cost to recognise as an asset and carry forward, and when that cost becomes an expense, including any write-down to net realizable value. One standard, five jobs:
1. Identify
What counts as inventory under the definition
2. Measure
The cost to carry it on the statement of financial position
3. Write down
To net realizable value (NRV) when cost is not recoverable
4. Recognise expense
Move the carrying amount to surplus or deficit
5. Disclose
By classification, with policies and write-down detail
Scope — what’s in and what’s out IPSAS 12.2–8
Every entity preparing accrual-basis financial statements applies IPSAS 12 to all inventories, except for three carve-outs that belong to other standards.
Within IPSAS 12
Goods held for sale or distribution · materials and supplies awaiting use · work-in-progress of goods (including educational materials and chargeable client services such as auditing)
Outside IPSAS 12
Financial instruments (IPSAS 41) · biological assets and agricultural produce at the point of harvest (IPSAS 27) · work-in-progress of services provided for no or nominal consideration (a public-sector-specific exclusion)
Two further measurement carve-outs exist for producers of agricultural, forest, and mineral products, and for commodity broker-traders, where well-established industry practice measures inventory at net realizable value or fair value less costs to sell — these are excluded only from the measurement requirements, not the standard entirely.
2.Key definitionsIPSAS 12.9
Three terms carry the whole standard. Get these fixed before moving to measurement.
| Term | Meaning |
|---|---|
| Inventories | Assets (a) in the form of materials or supplies to be consumed in production; (b) materials or supplies to be consumed or distributed in rendering services; (c) held for sale or distribution in the ordinary course of operations; or (d) in the process of production for sale or distribution. |
| Net realizable value (NRV) | The estimated selling price in the ordinary course of operations, less the estimated costs of completion and the estimated costs necessary to make the sale, exchange, or distribution. NRV is entity-specific — it is not the same as fair value less costs of disposal. |
| Current replacement cost | The cost the entity would incur to acquire the same asset on the reporting date. Used as the measurement floor for goods held for free or nominal distribution. |
Inventories in the public sector IPSAS 12.11–12
Government stock goes well beyond goods purchased for resale. IPSAS 12 specifically lists the kinds of items public entities are likely to be carrying:
Military inventories
Single-use items: ammunition, missiles, rockets, bombs
Strategic stockpiles
Energy reserves held for emergencies (e.g. oil)
Stamps & currency
Unissued currency and postal supplies — measured at printing/minting cost, never face value
Spare parts
For plant and equipment, other than those covered by IPSAS 45
Consumable & maintenance stores
General stores and maintenance materials
Work-in-progress
Training course materials; chargeable client services such as audits; land/property held for sale
Where government controls the right to create an asset — postal stamps, currency — those items are still recognised as inventory under IPSAS 12, but at their printing or minting cost, never at face value IPSAS 12.13.
3.Measurement: the lower of cost and NRVIPSAS 12.15–17
The general rule is simple: inventories are measured at the lower of cost and net realizable value. Two exceptions sit either side of that rule, depending on how the inventory was acquired and what it will be used for.
Q1.Is net realizable value below cost?
No → carry at costYes → go to Q2
Q2.Is the item held for distribution at no charge or for a nominal charge (or consumed to produce such goods)?
No → use NRV as the carrying amount; write down the differenceYes → carry at the lower of cost and current replacement cost instead of NRV
Acquired through a non-exchange transaction(e.g. donated)?
Initial cost = fair value at the date of acquisition
Worked Example 1
Kenyatta Referral Hospital — drugs near expiry
A national referral hospital holds antibiotics that are close to their expiry date. Demand has fallen and they can only be used at a reduced value.
KES 800,000Cost
KES 620,000Net realizable value
Required:
- At what amount are the drugs carried?
- Give the journal entry for any write-down.
Solution
NRV (620,000) is below cost (800,000), so the drugs are carried at the lower of the two — KES 620,000. The difference of KES 180,000 is written down through surplus or deficit.
Dr Write-down expense ............ 180,000 Cr Inventory 180,000
4.Cost of inventories: three componentsIPSAS 12.18–27
The cost of inventories comprises all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. Nothing more.
Costs of purchase
Purchase price + import duties and other non-recoverable taxes + transport, handling, and other costs directly attributable to acquisition — less trade discounts, rebates, and similar items
Costs of conversion
Direct labour, plus a systematic allocation of fixed and variable production overheads (based on normal capacity for fixed overheads, and actual usage for variable overheads)
Other costs
Only to the extent they are incurred in bringing inventories to their present location and condition — e.g. non-production overheads attributable to a specific customer’s design requirements
Worked Example 2
KEMSA imports medical supplies
A state corporation imports medical supplies for a national programme. Import duties are not recoverable. VAT charged on the import is recoverable from KRA. A trade discount was negotiated.
| Item | KES |
|---|---|
| Purchase price | 5,000,000 |
| Import duties (non-recoverable) | 400,000 |
| VAT (recoverable from KRA) | 800,000 |
| Transport | 250,000 |
| Trade discount | (300,000) |
Required:
- Compute the cost of purchase under IPSAS 12.
- State which items are excluded and why.
Solution
Recoverable VAT is excluded — it is recoverable from the taxing authority and so never forms part of the cost of inventory. Non-recoverable duties are included, as are transport and handling. The trade discount is deducted.
| Component | KES |
|---|---|
| Purchase price | 5,000,000 |
| Import duties (non-recoverable) — included | 400,000 |
| VAT (recoverable from KRA) — excluded | — |
| Transport and handling | 250,000 |
| Less: trade discount | (300,000) |
| Cost of purchase | 5,350,000 |
Costs you must exclude IPSAS 12.25
These are expensed as incurred and never capitalised into inventory:
- Abnormal amounts of wasted materials, labour, or other production costs
- Storage costs, unless those costs are necessary in the production process before a further production stage
- Administrative overheads that do not contribute to bringing inventories to their present location and condition
- Selling costs
5.Cost formulas: FIFO and weighted averageIPSAS 12.32–37
Where items are not ordinarily interchangeable — goods or services segregated for a specific project — cost is assigned by specific identification of individual costs. For everything else, an entity uses either FIFO or weighted average, applying the same formula consistently to all inventories of similar nature and use.
First-in, first-out (FIFO)
Assumes the items purchased first are sold first. Items remaining in inventory at the end of the period are those most recently purchased or produced.
Weighted average
The cost of each item is the weighted average of similar items at the start of the period and those purchased or produced during it. May be recalculated periodically or with each shipment received.
Worked Example 3
National Fuel Reserve — strategic stockpile
A strategic reserve agency holds fuel and buys more during the year. Issues are valued using the weighted average cost formula.
10,000 L @ 150Opening
20,000 L @ 165Purchase
12,000 LIssued
Required:
- Compute the weighted average cost per litre.
- Value the closing stock of 18,000 litres.
Solution
| Movement | Litres | KES |
|---|---|---|
| Opening (10,000 @ 150) | 10,000 | 1,500,000 |
| Purchase (20,000 @ 165) | 20,000 | 3,300,000 |
| Weighted average = 4,800,000 ÷ 30,000 | — | 160 / L |
| Closing stock (18,000 @ 160) | 18,000 | 2,880,000 |
Total value of 4,800,000 over 30,000 litres gives a weighted average rate of KES 160 per litre. The 18,000-litre closing stock is therefore valued at KES 2,880,000.
6.When inventory becomes an expenseIPSAS 12.44–46
The carrying amount of inventory moves to surplus or deficit at one of three trigger points:
Sold or exchanged
Expensed in the period the related revenue is recognised
Distributed free of charge
Expensed as a transfer expense under IPSAS 48
Write-downs and losses
Expensed in the period the write-down or loss occurs; reversals reduce the expense in the period of reversal
Tracking the year’s movement
A typical stores account for a water company over the year, in KES ‘000:
| Movement | KES ‘000 |
|---|---|
| Opening balance | 1,200 |
| Purchases | +3,500 |
| Issued to expense | −3,000 |
| Write-down | −200 |
| Closing balance | 1,500 |
Worked Example 4
A public university clinic — service provider expense
A public university health unit issues medical supplies from its stores to treat students during the semester.
KES 350,000Cost of supplies issued
Required:
- When is the cost recognised as an expense?
- Give the journal entry.
Solution
For a service provider, inventory is recognised as an expense when the service is rendered (or upon billing for chargeable services) IPSAS 12.45.
Dr Consumption of supplies ......... 350,000 Cr Inventory 350,000
7.When to write down to NRVIPSAS 12.38–42
Cost may not be recoverable for one of four reasons:
01 · Damaged
Physical loss of usable value
02 · Wholly or partly obsolete
No longer needed or saleable
03 · Selling prices have declined
Market value has fallen below cost
04 · Costs to complete or sell have risen
Less is recoverable on disposal
Write-downs are made item by item (grouping is only appropriate for similar or related items that cannot practicably be evaluated separately). A new assessment of NRV is made each period — if the circumstances that caused a write-down no longer exist, the write-down is reversed, but only up to the amount of the original write-down, so the new carrying amount never exceeds the lower of cost and the revised NRV.
Worked Example 5
State Department stores — obsolete stationery
A State Department holds pre-printed stationery that is now obsolete after a rebrand. It can only be recycled for a small amount.
KES 500,000Cost
KES 120,000Net realizable value
Required:
- Compute the write-down.
- Give the journal entry.
Solution
Write-down = Cost (500,000) − NRV (120,000) = KES 380,000, recognised as an expense in the period identified.
Dr Write-down expense ............ 380,000 Cr Inventory 380,000
8.Disclosure requirementsIPSAS 12.47–50
The financial statements must give users enough information to understand how inventory was measured and how it moved during the period.
| Disclosure | Detail |
|---|---|
| Accounting policy | The measurement basis and cost formula used |
| Carrying amounts | Total, and by classification appropriate to the entity (merchandise, production supplies, materials, work-in-progress, finished goods) |
| Expense for the period | The amount of inventory recognised as an expense, including unallocated production overheads and abnormal production costs |
| Write-downs & reversals | The amount written down, any reversals, and the circumstances or events that led to a reversal |
| Pledged inventory | The carrying amount of inventories pledged as security for liabilities |
Where inventory is measured at fair value after initial recognition, additional disclosures under IPSAS 46 apply — measurement techniques and inputs, the fair value hierarchy level, and for Level 3 measurements, a reconciliation of opening to closing balances and sensitivity to unobservable inputs IPSAS 12.50A–50F.
9.Common mistakesIPSAS 12.15–25
Where public sector entities most often go wrong with this standard:
Mistake: Carrying postal stamps or unissued currency at face value.
Reality: These are measured at their printing or minting cost, not at the value printed on them IPSAS 12.13.
Mistake: Capitalising storage, administrative, or selling costs into the cost of inventory.
Reality: These are expensed as incurred — storage only qualifies if it is a necessary step before a further stage of production IPSAS 12.25.
Mistake: Ignoring write-downs on damaged or obsolete stock because “it’s still on the shelf”.
Reality: If NRV has fallen below cost, the write-down is recognised in the period — carrying value above recoverable amount overstates assets IPSAS 12.38–39.
Mistake: Recording donated inventory at zero cost.
Reality: Inventory acquired through a non-exchange transaction is initially measured at its fair value as at the date of acquisition — not at nil IPSAS 12.16, 31.
10.Check your understandingIPSAS 12.15
Drugs cost KES 800,000; NRV is now KES 620,000. At what amount are they carried?
A. KES 800,000 — always at cost
B. KES 620,000 — the lower of cost and NRV
C. KES 710,000 — the average of the two
D. KES 1,420,000 — cost plus NRV
Answer: B. NRV of 620,000 is below cost, so the drugs are carried at 620,000 and the 180,000 difference is written down.
