NET REALIZABLE VALUE AND SETTING UP OF THE INVENTORY PRICE DECREASE RESERVE

18. The value of inventories cannot be fully recovered when they become damaged, outmoded, their selling prices fall or the finishing and/or sale costs rise. The marking-down of inventories to the level equal to the net realizable value is compliant with the principle that assets must not be shown at a value higher than the realized value estimated from their sale or use.

19. At the end of the accounting period of the year, when the net realizable value of inventories is lower than their original price, the reserve for inventory price decrease must be set up. The amount of the to be-set up inventory price decrease reserve is the difference between the original price of inventories and their net realizable value. The inventory price decrease reserve shall be set up for each kind of inventories. For services incompletely provided, the inventory price decrease reserve shall be set up for each type of service with different charges.

20. The estimation of the net realizable value of inventories must be based on reliable evidences gathered at the time of estimation. Such estimation must take into account price fluctuations or costs directly related to events occurring after the ending day of the fiscal year, which have been anticipated through conditions existing at the time of estimation.

21. When estimating the net realizable value, the purpose of the storage of inventories must be taken into account. For example, the net realizable value of the inventories reserved to ensure the performance of uncancellable sale or service provision contracts must be based on the values inscribed in such contracts. If the volume of inventories is bigger than that of goods needed for a contract, the net realizable value of the difference between these two volumes shall be appraised on the basis of the estimated selling price.

22. Raw materials, materials, tools and instruments reserved for use in the manufacture of products must not be valued lower than their original price if the products which have been manufactured with their contributions are to be sold at prices equal to or higher than their production costs. Where there appear decreases in the prices of raw materials, materials, tools and/or instruments but the production costs of products are higher than their net realizable value, the raw materials, materials, tools and instruments left in stock may have their value lowered to be equal to their net realizable value.

23. At the end of the accounting period of the subsequent year, a new appraisal of the net realizable value of inventories by the end of such year must be conducted. Where at the end of the accounting period of the current year, if the to be-set up reserve for inventory price decrease is lower than the inventory price decrease reserve already set up at the end of the accounting period of the previous year, the difference thereof must be added thereto (under the provisions in paragraph 24) in order to ensure that the value of inventories shown on financial statements is computed according to the original price (if the original price is lower than the net realizable value) or according to the net realizable value (if the original price is higher than the net realizable value).

RECOGNITION OF COSTS

24. When selling inventories, the original price of goods sold shall be recognized as production and business expense in the period in consistence with the recognized turnover related thereto. All the difference between the higher inventory price decrease reserve to be set up at the end of the current year’s accounting period and the lower inventory price decrease reserve already set up at the end of the previous year’s accounting period, volumes of damaged and lost inventories, after subtracting the compensations paid by individuals due to their liabilities, and unallocated general production costs, shall be recognized as production and business expense in the period. Where the inventory price decrease reserve to be set up at the end of the current year’s accounting period is lower than the inventory price decrease reserve already set up at the end of the previous year’s accounting period, the difference thereof must be added and recorded as decrease in production and business expense.

25. Recognition of the value of goods sold as expense incurred in the period must ensure the expense – turnover matching principle.

26. Where some kinds of inventories are used for manufacture of fixed assets or use like self-manufactured workshops, machinery and/or equipment, the original price of these inventories shall be accounted into the fixed asset value.