Rescinded [2017-04-01] - Accounting Standard 3.4 - Treasury Board - Inventories

This standard prescribes the method of accounting for consumable inventories and inventories for resale in departmental financial statements.
Date modified: 2001-04-01

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This section should be read in conjunction with CICA Handbook section 3030.

There are a variety of elements governing the management and reporting of inventories. This standard prescribes the method of accounting for consumable inventories and inventories for resale in departmental financial statements. Other guidance related to the control and management of inventory can be found in:


1. Items in inventory are purchased or produced goods that are not immediately consumed. They are recorded as an asset until they are issued for consumption or sale, at which time they are expensed.

2. There are two basic types of inventories:

  1. Consumable inventories consist of physical items that are to be consumed in a future year directly or indirectly in the delivery of program outputs. They include all physical items such as equipment, spare parts and material that are held in stores and warehouses for issue at a later date. They also include inventories held for resale within the Government of Canada. Consumable inventories exclude purchases that meet the capitalization criteria specified in TBAS 3.1 Capital Assets.
  2. Inventories held for resale are physical items that will be sold (or used to produce a product which will be sold, e.g. raw materials) in the ordinary course of business to parties outside of the Government reporting entity in the future.

Items in inventory

3. The characteristics determining the accounting treatment for a purchased item are useful life and cost. (See TBAS 3.1 for more information on the accounting for capital assets.)

  1. Inventory items:
    1. Generally have a useful life of less than one year; and
    2. Cost is not a determining factor.
  2. Capital Assets:
    1. Have a useful life greater than one year; and
    2. Have an acquisition cost greater than the departmental capitalization threshold.
  3. Pooled Assets (category of Capital Assets)
    1. Have a useful life of greater than one year; and
    2. Have an individual acquisition cost less than the departmental capitalization threshold but have a combined cost that is material for the department.

4. Inventory does not include items where legal title has not passed to the Crown such as items on consignment from suppliers.

5. Unless otherwise arranged with another department, all items for which title has passed to the Crown that are under the control of a department shall be included in inventory of that department.

6. From an accounting point of view, items issued from inventory to an end-user (the party who will use the item) are considered consumed and hence are expensed. For this reason, the inventory balance for financial reporting purposes does not include items in the hands of end-users.

7. In most cases, any discrepancy between physical consumption and consumption from an accounting point of view is insignificant. However, for items with an individual cost that is material, physical consumption should be taken into consideration in determining the accounting treatment.

8. The accounting treatment of an inventory item does not override the need for inventory controls. Items that have been expensed for accounting purposes but have been used and returned to inventory for re-issue should continue to be subject to the department's internal controls over inventory.

Accounting for inventory

9. Inventory balances must be recorded for all material values of items on hand. It is not expected that inventory balances be recorded for insignificant amounts of inventory, such as may be the case for office stationery and supplies. The level of materiality set for inventory should be based on professional judgement and should take into consideration factors such as annual spending on inventory items, the department's capitalization threshold for capital assets, and the role inventories play in a department's operations.

10. Departments must possess reliable inventory records to support the amounts recorded in their financial statements. Periodic inventory counts are necessary to confirm the reliability of the inventory records. The frequency and scope of the inventory count depends on the value and nature of the inventory, the controls in place and whether a perpetual or periodic system is used. If a periodic system is used, a complete physical count must be taken at least annually, preferably at March 31. For perpetual systems, counts should be taken following the suggestions of the Material Management Policy with more frequent verification of records through samples between counts.

11. The cost of inventory items depends on their nature:

  1. For inventories of raw materials, goods purchased for resale and for internal consumption, the cost includes all costs incurred in acquiring the item, including shipping and handling charges but excluding sales taxes;
  2. For work in process and finished goods, the cost will include all direct costs of materials and services, plus the cost of direct labour applied to the product. Overhead costs directly attributable to production may also be included in the cost.

12. Where the storage of goods for a significant time is an integral part of the manufacturing process, the cost may also include the applicable share of warehousing expenses.

13. Regardless of the type of inventory, departments should develop procedures to identify and account for the following:

  1. Obsolete items - items no longer considered to be usable should be removed from the inventory asset account and charged to an expense account. When charges are significant, it will be necessary to disclose specific details on the obsolete inventory for financial reporting purposes.
  2. Surplus/damaged items - items no longer deemed to have service potential for the government or have been damaged should be valued at the lower of cost or net realizable value.
  3. Missing/lost items - items that have disappeared from inventory because of shortages, loss by fire, theft or unauthorized distribution should be removed from inventory and charged to an expense account.

14. Several methods are used in determining inventory cost. The following are the most common methods:

  1. Specific identification - the cost of each item in the inventory is identified on an item by item basis;
  2. Average cost - the cost of an item is determined from the weighted average of the cost of similar items purchased at different selected intervals;
  3. First In, First Out (FIFO) - the cost of the first goods purchased or acquired is the cost assigned to the first goods sold or consumed;
  4. Standard costing-this method is used in manufacturing organizations and consist of a determination of costs that should be incurred to produce a product under normal conditions and operating circumstances.

15. The method selected for determining cost should be one that results in the fairest matching of costs against revenues regardless of whether or not the method corresponds to the physical flow of goods. Where there is no direct revenue generation, the method selected should be that which results in the fairest matching of costs with program delivery activity.

Financial reporting

16. Inventories are to be classified as a non-financial asset on the Statement of Financial Position. If a department has a significant value of inventories held for resale, it may choose to report these separately as a financial asset.

17. Departmental financial statements should disclose the basis of valuation used to value the inventory in the significant accounting policies note to the financial statements. If the method of determining cost has resulted in a figure that does not differ materially from recent cost, the simple term "cost" can be used to describe the basis of valuation. Otherwise, the method of determining cost should be disclosed. Proposed note disclosure is as follows:

"Inventories held for re-sale - these are valued at the lower of cost and net realizable value. (This note would be amended to reflect the valuation method being used in the department or agency.)

Inventories not for re-sale - these are comprised of spare parts and supplies that are held for future program delivery and are not intended for re-sale outside the Government. They are valued at cost. If they no longer have service potential, they are valued at the lower of cost or net realizable value."

18. Any change from the basis used in the previous period, and the effect of such a change on the net operations for the period should be disclosed in a note to the financial statements.

Effective date

19. This policy is effective April 1, 2002 and should be applied retroactively. Earlier implementation is encouraged.

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