Route 102 – One man’s year-long journey……Day 46

  • By Jeremy Williams
  • 8 April 2015 00:00

To mark this momentous year for UK GAAP, I'm embarking on a mission to work my way through FRS 102, reading a portion on each working day of 2015 and writing a short blog entry on my thoughts and musings (be they few or many).

Day 46 (8 April)

Here's an odd sentence from section 13:

'Inventories held for distribution at no or nominal consideration shall be measured at cost adjusted, when applicable, for any loss of service potential' (13.4A).

What on earth does it mean? Well, the segments in bold are defined terms but the Glossary isn't particularly revealing on the first of these. It defines service potential as 'The economic utility of an asset, based on the total benefit expected to be derived by the entity from use (and/or through sale) of the asset.' Which isn't immediately any clearer to me, I must admit.

Here's an example. Let's say you'd bought some items to sell, such as T-shirts emblazoned with the slogan 'Leicester City: A Premiership Side!', and now decided that there wasn't much of a market for these anymore; instead you'll give them away at a pittance. Well, this is simply a product whose NRV (or ESPLCTCAS if you were reading yesterday's blog) has now fallen below cost. You'd write them down accordingly.

But what if you'd bought some stock of longer-lasting value (mugs adorned with a picture of the - hopefully winning - Northampton Saints rugby team) but had decided to give these away for a song to celebrate the team's fortune? It's not that 'true' NRV has fallen, it's simply that you are going to forego the opportunity to sell these at normal market rate or to enjoy gazing at them on your desk (full of lovely tea). In other words, you'll lose 'service potential', and this loss should be deducted from the cost much as a write-down to NRV would do for the Foxes T-shirts.

Hopefully that's a bit clearer now. This may be my last post, as if any of my Leicester colleagues read it, I am unlikely to be able to write again. In fact, I'm away for a couple of days so all being well, we'll pick up again on Monday.

P.S. If you missed the last instalment click here

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