Capitalize unconsumed office supplies?

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pub_acco
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Capitalize unconsumed office supplies?

Post by pub_acco »

Is it common under IFRS to defer the cost of office supplies unconsumed as of a reporting date as a current asset such as Prepaid Expenses? I mean by "office supplies" the stationery, printing paper, and other tangible short-term consumables used in selling, general, and administrative activities, and thus they are out of the scope of either inventories (IAS 2), contract costs (IFRS 15), office equipment (IAS 16), advertising materials, or R&D expenditures (IAS 38). It is pretty common in our local gaap to recognize deferrals for such items but IFRS doesn't seem to have a clear provision.
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Marek Muc
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Re: Capitalize unconsumed office supplies?

Post by Marek Muc »

to me they are clearly in the scope of IAS 2 and can be treated as inventory until consumed
but why would you do that... I can't imagine them becoming of any significant value, so why bother tracking them?
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Re: Capitalize unconsumed office supplies?

Post by pub_acco »

Hi Marek,

IAS 6.2(c) says "in the form of materials or supplies to be consumed in the production process or in the rendering of services," so I think supplies consumed in SG&A process are excluded from the scope. Actually, office supplies are explicitly covered by the inventory standard under our local gaap, and all big 4 warn that they are not in the scope of IAS 2 in their IFRS-GAAP difference publications.

I am aware these office supplies are usually immaterial. I was talking with my colleagues about a hypothetical situation where prepaid SG&A expenses are material: what if a company purchased a luxury car as a gift to a customer but has not delivered it yet. It's obviously a ridiculous situation, but we were looking for a concrete example of the initial recognition exemption of IAS 12. Since such entertainment expenses are not tax-deductible in my country, this case can be an example of IRE if this prepayment gives rise to an asset.
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Marek Muc
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Re: Capitalize unconsumed office supplies?

Post by Marek Muc »

I will really be thrilled to see a BIG4 publication saying that office supplies are not inventories under IAS 2....

your example with marketing supplies is a different story, they are indeed expensed once they are delivered
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Re: Capitalize unconsumed office supplies?

Post by pub_acco »

Thank you!
marea
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Re: Capitalize unconsumed office supplies?

Post by marea »

I also think that this is part of inventory. In their publication International GAAP 2019, p. 1592, EY specifically mentioned office supplies when estimating NRV of inventory."For inventory such as unused office supplies that are held for internal use and not sale to third parties......."
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Re: Capitalize unconsumed office supplies?

Post by JRSB »

How much paper and pens do you have lying around?!
pub_acco
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Re: Capitalize unconsumed office supplies?

Post by pub_acco »

Thank you marea. That's a good point. In the NRV context, I think the office supplies mean the supplies to be consumed in the rendering of services. The book emphasizes that selling costs should be excluded from the cost of inventories, so I think it's more consistent to interpret the inventories consumed in the selling process are excluded from the scope of IAS 2. The same book though also discusses that in some industries distribution costs may be included in the cost of inventories and judgement is needed to determine what the "production process" mean.

JRSB - :roll:
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Re: Capitalize unconsumed office supplies?

Post by Marek Muc »

When you say that something should be included or excluded from the cost of inventories, this confirms that they should be recognised as assets, but the question is what should be included in their cost, i.e. their carrying value
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Re: Capitalize unconsumed office supplies?

Post by pub_acco »

I mean, I think IAS 2 is consistent in that it limits the scope to "production process" and excludes SG&A costs from the cost of inventories.
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Re: Capitalize unconsumed office supplies?

Post by Marek Muc »

that's an interesting view...

you said that there are BIG4 publications that are also of this view, can you please share one?

Marea cited EY's publication where they say that office supplies for internal use *are* inventories in the scope of IAS 2
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Re: Capitalize unconsumed office supplies?

Post by marea »

I think what the book means are e.g. inventories of finishied goods. In that case only direct and indirect production costs are considered. For example, office supplies used by the production supervisor would be included in the costs of goods produced but not sold yet. On the other hand, office supplies used by the sales or accounting department would not be included in the costs of finished goods.
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Re: Capitalize unconsumed office supplies?

Post by pub_acco »

https://www.eyjapan.jp/services/assuran ... -06-23.pdf

https://assets.kpmg/content/dam/kpmg/jp ... 020-05.pdf (p.22)

I think office supplies are inventories as long as they are used in production process or in rendering of services, so e.g. pens and paper stocked at a consulting company and those stocked by production departments of a manufacturing company are inventories subject to IAS 2. But if office supplies are held by a manufacturing company solely for the purpose of SG&A activities, I don’t think they bureaucratically meet the definitions listed in IAS 2.6.
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Re: Capitalize unconsumed office supplies?

Post by nguyenlong »

In my view, office supplies are in the scope of IAS 16 if they are used for more than 1 year. If not, then they should be expensed as incurred.
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Re: Capitalize unconsumed office supplies?

Post by Marek Muc »

It's possible for some office supplies to fall under IAS 16, but they need to be used for more than one year as you said
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Re: Capitalize unconsumed office supplies?

Post by pub_acco »

Technically, we can use a good pen for more than one year but I can hardly imagine a situation we capitalize office supplies under IAS 16 :roll: Anyway, now I understand the standards are not clear and there are variations of practices. And, that's not a problem at all because office supplies are immaterial in 99% of cases.
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Re: Capitalize unconsumed office supplies?

Post by Marek Muc »

The publication by KPMG is in Japanese, would you mind copying the relevant wording to google translate and pasting here the English version?
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Re: Capitalize unconsumed office supplies?

Post by pub_acco »

Page 22. Wasn't aware the pdf was protected.

IFRS
棚卸資産の範囲 (IAS 2.6(c), 16、IAS 16.8、IAS 38.69)
Scope of inventories

販売活動及び一般管理活動において短期的に消費される事務用消耗品等の取扱い
Treatment of office consumables, etc. consumed in the short term through selling, general and administrative activities

基準上、取扱いが明記されていないため、「生産過程またはサービスの提供にあたって消費される原材料または貯蔵品」に該当するか否かで判断する
Since the standard is not explicit on the treatment, judgement is needed based on whether they are "materials or supplies to be consumed in the production process or in the rendering of services"

J-GAAP
(基準9号3項)
(Standard 9.3)

棚卸資産には、売却を予定しない資産であっても、販売活動及び一般管理活動において短期間に消費される事務用消耗品等も含まれる
Inventories include office consumables, etc. consumed in the short term through selling, general and administrative activities even if they are not the assets for sale

Translation by me ;)
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Re: Capitalize unconsumed office supplies?

Post by jonyicheng »

Office supplies are not inventories unless you are in the business of selling office supplies. They should be, strictly, in scope under IAS 16 but generally are of low value and are expensed as purchased. Low value capitalisation threshold is not determined explicitly by the Standard but as Auditors we usually benchmark this against materiality.
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Re: Capitalize unconsumed office supplies?

Post by JRSB »

Inventory also includes inputs to the value production process in the ordinary course of business - you don't have to be selling the product that you hold as inventory
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Re: Capitalize unconsumed office supplies?

Post by pub_acco »

I agree inventories don’t need to be sold, but I’m not really sure if "consumed in the production process or in the rendering of services" as in IAS 2.6 can be interpreted that broadly. At least, IAS 38.69 explicitly excludes supplies for research, advertising, promotions, and so on from the scope of inventories.

jonyicheng, do you know any grounds for "expensed as purchased"? Office supplies covered by IAS 2 are expensed when consumed, and those used for more than one year and thus covered by IAS 16 are expensed systematically based on the pattern of consumption (ie depreciation), whereas those covered by IAS 38 are expensed when purchased. The treatment of the office supplies that are not covered by any of the above is in question. Expensed when consumed or when purchased?
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Re: Capitalize unconsumed office supplies?

Post by Marek Muc »

I personally changed my mind after our discussion and I now agree that office supplies are in fact out of scope of IAS 2. In my opinion, if they don't fall under the scope of IAS 16 (i.e. won't be used for more than 1 year), they are not specifically covered by IFRS. So entities need to develop your own accounting policy, and the best reference to do so is IAS 2 :) Therefore I would account for office supplies in the exact same way as inventories under IAS 2. Of course, majority of office supplies is immaterial and thus they can be expensed when received
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Re: Capitalize unconsumed office supplies?

Post by pub_acco »

That’s a great recap of the discussion. I would totally agree to your opinion ;)
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