When it comes to receiving free inventory, the accounting treatment can be tricky. Whether you’re receiving assets from a government body, suppliers, or shareholders, understanding the correct International Accounting Standard (IAS) to apply is crucial. This guide will explain how to record free inventory, particularly under IAS 2, and how other IAS rules, such as IAS 20 for government grants, may apply.

Free Inventory: Different Sources, Different Accounting

1. Free Assets from the Government: If your company receives assets as part of a government grant, these are accounted for under IAS 20 (Government Grants and Government Assistance), not IAS 2. This applies to grants from any governmental entity, whether local, national, or international bodies like the IMF, World Bank, or UN. The assets received must be disclosed according to the specific conditions of the grant, and the valuation process must adhere to IAS 20’s rules.
2. Free Assets from a Supplier: When free assets are received from a supplier, such as spare parts in a purchase contract, they are considered a form of discount under IAS 16 (Property, Plant, and Equipment). The fair value of the free assets must be deducted from the total purchase price, effectively lowering the cost of the purchased inventory.
3. Free Assets from Shareholders: Shareholders may transfer assets like machinery or land to the company for free. In this case, IAS 2 and IAS 16 require that these assets be recognized at fair value. However, these contributions should not be recorded as income. Instead, they are reflected as capital contributions under the equity section of the balance sheet.

Practical Application

• Government Grants: Recorded under IAS 20, and recognized as either deferred income or deducted from the carrying amount of the related asset.
• Supplier Discounts: Recorded as part of the purchase cost reduction, adhering to IAS 2 or IAS 16.
• Shareholder Contributions: Recognized as capital contributions, not income, and added to the fixed asset account at fair value.

Key Journal Entries for Free Inventory

• Debit: Fixed assets (Fair value of the asset)
• Credit: Equity/Other income (Capital contribution)

This ensures the correct accounting treatment, aligning with IAS standards and providing accurate financial reporting.

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