Goods that are past their expiry date and damaged are inevitable for businesses. So when there is such goods, what should businesses do to bring it to a reasonable cost? What documents do businesses need to prepare?

1. Relevant legal documents

1.1. Accounting Standard No. 02

Vietnamese Accounting Standard No. 2 – Inventories:

"3. Net realizable value: is the estimated selling price of inventories in the normal production or business period minus (-) the estimated costs to complete the products and the estimated costs necessary for the completion of the product. their consumption.

19. At the end of the annual accounting period, when the net realizable value of inventories is less than their original cost, a provision must be made for devaluation of inventories. An allowance for devaluation of inventories is made as the difference between the cost of inventories and their net realizable value. Provision for devaluation of inventories is made on a per-inventory basis.

22. Raw materials, materials and tools and tools stored for use in the production of products must not be valued less than their original price if the products they contribute to will be sold at or above. production cost of the product. When there is a decrease in the price of raw materials, materials, tools and instruments, but the production cost of the product is higher than the net realizable value, the raw materials, materials, tools, and supplies are in stock. assessed down to their net realizable value”.

1.2. Circular 200/2014/TT-BTC - Guidance on Enterprise Accounting Regime

Pursuant to Article 45 – account 229 “Provision for property loss”

1.5. Accounting principles for inventory devaluation

a) Enterprises that make provision for devaluation of inventories must make when there are reliable evidences of impairment of the net realizable value compared to the original cost of inventories. Provision is an amount anticipated in advance to include in production and business costs the part of the value that is lower than the book value of inventory and is intended to compensate for actual losses caused by the material. Investments, products, and inventories are reduced in price.

b) Provision for devaluation of inventories is made at the time of preparation of financial statements. The provision for devaluation of inventories must be made strictly in accordance with the provisions of the Accounting Standard “Inventories” and the provisions of the current financial regime.

c) The provision for devaluation of inventories must be calculated according to each type of inventory materials, goods and products. For services in progress, the provision for devaluation of inventories must be calculated for each type of service with a separate price.

d) Net realizable value of inventories is the estimated selling price of inventories in the normal production or business period minus (-) estimated costs of completion and estimated costs. necessary for their sale.

dd) When preparing the financial statements, based on the quantity, original cost, and net realizable value of each type of supplies, goods, and services in progress, determine the provision for decrease in value. inventory price to be established:

– In case the provision for devaluation of inventories to be made at the end of this accounting period is larger than the provision for devaluation of inventories recorded in the accounting books, the larger difference is recorded as an increase in provision and an increase in value. capital goods sold.

– In case the provision for devaluation of inventories to be made at the end of this accounting period is smaller than the provision for devaluation of inventories recorded in the accounting books, the smaller difference shall be reversed and recorded as a decrease in the provision and recorded in the accounting books. reduce cost of goods sold.

Circular 48/2019/TT-BTC - Guidelines for setting up and managing provisions

Article 4. Provision for devaluation of inventory

Objects to make provision include raw materials, materials, tools, instruments, goods, goods purchased in transit, goods sent for sale, goods in tax-suspension warehouses, and finished products (hereinafter referred to as inventory for short). ) where the original cost recorded in the accounting books is higher than the net realizable value and the following conditions are satisfied:

Having legal invoices and documents as prescribed by the Ministry of Finance or other reasonable proofs to prove the cost of inventory.

– Is the inventory owned by the enterprise at the time of making the annual financial statements.

The level of provisioning is calculated according to the following formula:

In which:

– Original cost of inventories is determined according to the provisions of Accounting Standard No. 02 – Inventories issued together with Decision No. 149/2001/QD-BTC dated December 31, 12 of the Minister of Finance and revised, supplemented or replaced text (if any).

- Net realizable value of inventories determined by the enterprise is the estimated selling price of inventories in the normal production and business period at the time of preparation of the annual financial statements minus (-) the estimated costs to complete the products and the estimated costs necessary for their consumption.

At the time of preparation of the annual financial statements, on the basis of documents collected by enterprises proving that the original cost of inventories is higher than the net realizable value of the inventories, the basis specified in Clauses 1 and 2 of this Article shall apply. Clause XNUMX of this Article, enterprises shall make provision for devaluation of inventories as follows:

a) If the provision to be made is equal to the balance of the provision for devaluation of inventories already made in the previous year's report recorded in the accounting books, the enterprise is not allowed to make additional provision for devaluation of inventories. b) If the provision to be set up is higher than the balance of the provision for devaluation of inventories already made in the previous year's report recorded in the accounting books, the enterprise shall add the difference to the cost of goods sold. sales during the period.

c) If the amount of the provision to be set up is lower than the balance of the provision for devaluation of inventories already made in the previous year's report recorded in the accounting book, the enterprise shall refund the difference and record the decrease in cost of capital goods sold in the period.

d) The level of provision for devaluation of inventories shall be calculated for each inventory item which is depreciated in price and summed up in a detailed list. The detailed list is the basis for accounting in the cost of goods sold (cost of all products and goods sold in the period) of the enterprise.

Handling of inventory for which provision has been made:

a) Inventories due to natural disasters, epidemics, fires, damaged, out-of-fashion, technical backward, obsolete due to changes in natural biochemical processes, expired, no longer valid for use must be handled, canceled or liquidated.

b) Handling competence:

The enterprise shall set up a Handling Council or hire a consulting organization with price appraisal function to determine the value of canceled or liquidated inventories. The inventory record to determine the value of processed inventory made by the enterprise clearly identifies the value of damaged inventory, the causes of damage, types, quantity and value of recoverable inventory. (if).

The Board of Directors, the Members' Council, the President of the company, the General Director, the Director, the owner of the private enterprise and the owner of other economic organizations shall, based on the minutes of the Council, handle or propose to the Board of Directors. the output of the consulting organization with the function of price appraisal, the evidence related to the inventory to decide to handle the cancellation or liquidation; decide to handle the responsibility of those related to such inventory and take responsibility for their decisions in accordance with the law.

1. c) Actual loss of each type of unrecoverable inventory is the difference between the value recorded in the accounting book minus the recovered value from the person who caused damage to compensations, from the insurance insurance agency. and from inventory liquidation.

The actual loss value of unrecoverable inventories has been decided to handle, after being offset with the reserve for devaluation of inventories, the difference is accounted into the cost of goods sold of the enterprise.

2. Implementation instructions

Pursuant to the above provisions, the Ministry of Finance has also issued a written response to enterprises' problems as follows:

• At the end of the accounting period, if the enterprise simultaneously determines that: (1) there is a decrease in the price of raw materials used for the purpose of manufacturing the product and (2) the production cost of the product (produced from that raw material) is higher than the net realizable value of the product, the enterprise must set up a provision for inventory price reduction for raw materials for that production purpose. Thus, if the production cost of the product (original price of inventory produced from raw materials with price reduction) is still less than the net realizable value, the enterprise does not set up a provision for inventory price reduction for that raw material.
• The level of provision for inventory price reduction (including raw materials used for normal production and business purposes of the enterprise) is implemented according to the instructions in Point 1.5, Clause 1, Article 45 of Circular 200/2014/TT-BTC and Article 4 of Circular 48/2019/TT-BTC.
• Determination of net realizable value of inventories: Based on the above regulations, at the end of the accounting period, enterprises shall base on the characteristics of production and business activities, information and evidence on inventory prices to make their own estimates of the selling price of inventories, costs to complete products and costs necessary for consumption as the basis for determining the net realizable value of inventories.

So, At the time of preparing the annual financial statements, based on documents collected by the enterprise proving that the original price of inventories is higher than the net realizable value of inventories, based on the above regulations, the enterprise shall make provisions for inventory price reduction and include it in the valid reasonable expenses when calculating taxes.