118
Basic finance is that a lender may extend credit to companies based on working capital needs to finance inventory and accounts receivables until the inventory is sold and the accounts receivables collected. Of course, this is ongoing because as a successful company grows so does its working capital financing needs. Selling $1,000,000 of inventory on credit for $2,000,000 to a customer who has 30 days to pays is wonderful but does not, on its own, help a company meet tomorrow’s payroll.
How can a company that quite literally grows its inventory do this? What value is assigned to seeds … clones and clippings … tissue cutlets or plantlets …. Bearer plants? How does this company use its inventory’s value to secure working capital financing when it cannot show any attestable value to its inventory because, for example, there are no purchase orders or receipts or payments? It however does know how long to harvest and from there how long it is to market. It does know its typical net crop losses. It does know the expected market value at time of sale. It does know its estimated cost of goods sold relating to sales.
If this company could record the estimated net selling value (value being expected sales revenues less expected costs – ie: gross profit) and did this exercise in good faith and integrity and then adjusted these values on final reconciliation at point of sale how is that conceptually different from a company that buys inventory and sells it and that net final selling price cannot be determined in advance as there could be mark downs, write offs, returns, partial refunds, or warranty expenses?
IAS 41 is not a one to one mapping to non IAS 41, but it is an attempt to somewhat level the playing field. The Income Statement is the tool used to record these estimates. Is that appropriate? Let’s assume that our example retailer only has a few accounts on its income statement: Sales, Cost of Goods Sold and Operating Expenses. Oversimplified yes but for this example we do not need to drill down further but to keep it somewhat real let’s further assume that this Retailer has a full and complete breakdown of all income statement accounts in their notes to the financial statements. This same company only records sales at the time of sale – in the spirit of keeping it simple.