New Inventory Accounting Standards Instituted
January 1
Following the adoption by other Asian countries and territories
such as Japan, Hong Kong, Singapore, and Korea of International Accounting
Standards (IAS) or similar accounting rules, Taiwan’s Financial Supervisory
Commission (FSC) decided to adopt the revised inventory accounting standards contained
in the Statement of Financial Accounting Standards No. 10：Inventory
on January 1 this year. Companies listed on the stock and over-the-counter
exchanges are now required to follow the new standards in compiling financial
statements, bringing them in line with international practice. The new rules
will enhance the quality of asset valuation by Taiwanese companies and increase
the transparency of corporate financial statements.
The new Statement No. 10 revises the definition and valuation of
inventory. The former rules based the market price of inventory on replacement
cost; the new ones use net realizable value to calculate the market price of
inventory. The old Statement No. 10 allowed the use of total value in comparing
cost and market value; with the exception of similar or related items, the new
rules do not allow the inclusion of inventory in a single class for purposes of
comparison. Also, under the old Statement No. 10 the methods for computing
inventory cost included the first-in, first-out (FIFO), last-in, first-out
(LIFO), weighted average, and individual; the new Statement No. 10 does not
allow the LIFO method, because it is unable to reflect true inventory flow.
Before implementing the new Statement No. 10, the FSC via the
Taiwan Stock Exchange and GreTai Securities Market conducted a questionnaire
survey of all 1,255 firms listed on the Taiwan Stock Exchange and GreTai
Securities Market in order to evaluate the effect of the new rules on the
listed firms. The survey showed that 67% of all listed companies would not see
the changes as a threat; for those companies that indicated they would have
problems implementing the new rules on time, the FSC asked the Taiwan Stock
Exchange and GreTai Securities Market to proactively provide guidance, and requested
that the Accounting Research and Development Foundation also offer needed
assistance. In addition, the two exchanges moved to promote understanding of
the impact of the new rules on profits by asking all listed companies to
simulate the effect of the new practices in their financial statements for the
third quarter of 2008; 68% of them (801 companies) provided figures for the
estimated effect, estimating an increase in loss allowances for market price
decline of NT$9.84 billion.
News Lexicon
Net Realizable Value: The sales value of an inventory item minus
the cost of completing the sale. For example: If an inventory item has a sales
value of NT$10 and the cost of selling it is NT$1, then its net realizable
value is NT$9.
