7.1: Definition

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Page ID: 97893

Glenn Arnold & Suzanne Kyle
Athabasca University via Lyryx

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IFRS defines inventories as assets that are:

held for sale in the ordinary course of business,
in the process of production for such sale, and
in the form of materials or supplies to be consumed in the production process or in the rendering of services (International Accounting Standards, n.d., 2.6).

The key feature of inventory is that it is held for sale in the normal course of business, which differentiates it from other tangible assets, such as property, plant, and equipment, that are only sold only when their productive capacity is exhausted or no longer required by the business. The definition also recognizes that for manufacturing businesses, inventory can take various forms throughout the production process. Raw materials, work in process, and finished goods are all considered inventory. For many businesses, inventory can represent a significant asset. In 2013, Bombardier Inc., a manufacturer of airplanes and trains, reported total inventory of $8.2 billion, which represented over 28 percent of the company's total assets. In the same year, Loblaw Companies Ltd., a grocery retailer, reported total inventory of over $2 billion.

It is not surprising that, given its significance, inventory can also be the source of various types of accounting problems. In 2014, BlackBerry had to write off approximately $2.4 billion of its inventory due to slow sales resulting from competitive pressures. In a more troubling series of events, inventories of DHB Industries Inc., a manufacturer of body armour for the military and police, were overstated by approximately $47 million in 2004. The accounting errors included the falsification of amounts included in work in process, and raw materials and a failure to write off significant amounts of obsolete raw materials. These accounting errors led to a Securities and Exchange Commission (SEC) investigation and penalties.

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