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(a) Inventories of materiel and equipment may be regarded as
expenditures in suspense and, accordingly, accounting and control
techniques applicable to them are described in this chapter.
(b) Accounting and control procedures are basically the same
for the purchase of inventories and for regular transactions, but
because inventories have continuing and often significant value
for some time after their purchase, additional procedures are
required to account for and control them until they have been
consumed in operations or have otherwise been disposed of.
Appropriate accounting and control techniques will vary between
departments depending on such factors as the quantities, dollar
values, and attractiveness of inventory items, and the need for
accurate cost information. In selecting appropriate techniques,
departments should consider the general requirements of
management for visibility, accountability, and control in all
financial matters. Through proper accounting for inventories,
financial reports can be significantly improved, custodians can
be held accountable for the assets under their control, and
decision-making on the acquisition and utilization of assets can
be facilitated.
(c) In this section the need for accounting control of
inventories is discussed; techniques for controlling inventories
of materiel and equipment through accounting records and physical
counts are explained; and some considerations on the financial
reporting of inventories are presented.
(a) Responsibility and accountability for the custody and use
of an asset extend over its useful life, especially when the
useful life exceeds the fiscal year and thus the bounds of normal
parliamentary financial control. Financial officers should
recognize that effective management of cash resources cannot be
achieved without equally effective management of assets after
they are acquired for cash. Although financial officers should
not assume functional responsibilities that have been assigned to
other functional disciplines, such as materiel management, or to
operating managers, they should ensure that significant
information relating to the custody and use of assets is
expressed in financial terms and is integrated with the principal
budgetary, accounting, and reporting systems of their
departments.
(b) Within a department, the extent to which financial control
of assets is appropriate will vary according to the circumstances
of each responsibility centre. Financial control should be
established when it is cost-effective to do so, or when there is
a use for additional financial information or additional internal
control. For example, financial control of stationery supplies
would rarely be useful for most responsibility centres, although
it would be expected of printing and publishing units or
materiel-handling and central-storage areas.
(c) Financial officers in each department should ensure that
requirements for accounting and financial control over
inventories of materiel and equipment, including clear
identification of inventories that must be controlled, are
communicated to line and functional managers responsible for
custody of inventories.
(d) Inventories of materiel and equipment are recorded at
nominal value on the Statement of Assets and Liabilities of the
Government of Canada, and there is no statutory requirement for
them to be recorded in total in the central accounting system of
the government, nor is there any regulatory requirement for
detailed departmental accounts, except when they are financed by
means of a revolving fund. However, a number of reasons why
departmental management should consider establishing accounting
control over such assets are stated below.
Each department should have systems to ensure that all
physical assets are in safe custody to protect against the loss
of assets through theft or misuse. The management of assets is
normally the responsibility of operational or specialized
functional managers, and these individuals will often operate
independent systems to record the costs of assets on hand. When
detailed inventory records are maintained either at operating or
at functional responsibility centres, internal control will be
strengthened if the duties of the custodians are clearly
separated from those of the record-keepers. In addition, and in
accordance with the principles established earlier in this
chapter, these record systems should be considered as subsidiary
accounting systems and should be integrated with the principal
accounting system of the department. Operation of a control
account in the principal accounting system provides independent
control over those operating the subsidiary system, ensuring that
they do not write off or otherwise dispose of assets without
appropriate authority. The attractiveness of assets and the
opportunities for misuse should be taken into account in
determining the need for independent control.
Investments in inventories of materiel and equipment are more
readily managed than most other expenditures. As such,
opportunities are provided to cushion the effect of budgetary
constraints by depleting inventories or to use up otherwise
lapsing funds by building up inventory levels. This may be good
management of financial resources, but it should be done only
with the full knowledge and approval of senior departmental
management and the appropriate program officer of Treasury Board,
since current-year appropriations are granted to satisfy
current-year operational expenditures. When inventory movements
distort the true operating results of a responsibility centre or
the cost of an activity, senior management may be misled and may
lose control over the operational performance of their
subordinates. In addition, since there are substantial costs
involved in carrying inventories, including the risk of
obsolescence, it is important that the total investment in
inventories be known from year to year.
By integrating inventory systems with the principal accounting
system, the effect of changing asset levels on costs is
eliminated from reports produced. Materiality will determine
needs in this area. In this respect, consideration should be
given to the effect of inventories on the program as a whole and
on the evaluation of performance of an individual responsibility
centre.
(a) Inventories of materiel include consumable operating
supplies and raw materials, goods in process of production, and
goods held for sale or reissue.
(b) Inventories of equipment include items that are not
expendable except through depreciation and normal wear and tear,
and that normally need maintenance. Examples are mechanical and
electrical machinery or equipment, motor vehicles, and furniture.
Practices for the financial control of equipment may also be
applied to minor capital items, small buildings, and holdings of
real estate that may be the property of departments.
(c) The Material, Risk and Common Services volume of the
Treasury Board Manual is a guide for use by departments
when reviewing their materiel management systems and
procedures.
(d) Techniques for accounting for inventories are described in
Appendix A.
(a) The principal financial reporting system of a department
should report totals of significant values of materiel and
equipment on hand at the end of each accounting period, by
category and by responsibility centre, with accumulated totals
being reported at higher levels of responsibility when
appropriate. The totals reported are useful as absolute values,
particularly at lower levels of responsibility, where, for
example, it may be desirable to ensure that minimum inventory
levels are being maintained. The totals, when compared with
budgeted levels and previous experience, are also a convenient
basis for identifying the effect of changing asset levels on the
system of budgetary control over cash appropriations.
(b) In the principal departmental accounting system, it may
also be desirable to report major exceptions either as an
analysis of the total balance or as charges to responsibility
centres for such items as obsolete, slow-moving, or damaged
inventories, or for under-utilization of equipment or real
estate.
Enquiries concerning this policy should be directed to your
departmental headquarters. For interpretation of this policy,
departmental headquarters should contact:
Financial and Contract Management Sector
Comptroller General Branch
Treasury Board Secretariat
L'Esplanade Laurier
300 Laurier Ave West
Ottawa, Ontario
K1A 0R5
Telephone: (613) 957-7233
Facsimile: (613) 952-9613
(a) This appendix describes alternative accounting methods to
effect financial control over inventories of materiel and
equipment when circumstances indicate the need for such
control.
(b) The choice of method used to exercise financial control
over inventories will depend upon the benefits to be attained
relative to the cost.
(c) The actual form of the inventory records can vary from
handwritten working papers or ledgers to sophisticated mechanical
or electronic inventory control systems.
The following variations are considered:
- use of subsidiary and control accounting records;
- use of control accounting records only; and
- inventory accounting in the absence of formal records by
periodic stocktaking.
In this method all entries in the departmental subsidiary
system are recorded individually or in total in a control account
in the principal departmental accounting system. These entries
include the costs of all receipts and issues; quantity shortages
or overages identified through physical stock counts; and
deletions of obsolete, damaged, or excess stock. The subsidiary
system should be regularly reconciled with the control
account.
For economy and simplicity, a subsidiary system may record
quantities of inventory only, but in these circumstances each
receipt or issue transaction should be assigned a value for entry
in a control account in the principal accounting system.
Periodically, the quantity balances shown on the subsidiary
system should be priced and reconciled in total with the control
account.
A system for accounting for inventories based on physical
stock counts may be suitable only when it is uneconomic or very
difficult to record each receipt and issue in the accounting
system. In these circumstances, the amount of inventory used in a
month or fiscal year may be determined by physical stock count on
the basis that the opening inventories, plus purchases during the
period, less closing physical inventories valued at unit cost
prices, represent the net cost of inventories consumed in the
period. The purchases in the period should be determined directly
from the departmental accounting system, using line objects to
obtain the necessary detail. The computed net cost of inventories
consumed in the period is allocated in the accounting records on
an appropriate and equitable basis, depending upon requirements
for financial reporting. A degree of financial control over such
inventories can be obtained through analysis of variances between
actual and budgeted costs to ensure that the rate of consumption
of inventories and total stock levels are in line with the level
of operating activity.
(a) Whatever the accounting system, there is a need to perform
physical counts to prove that there have been no serious lapses
in either physical custody or accounting controls over
inventories.
(b) Physical counts should be performed, summarized, and
verified with inventory records by persons who are independent of
the inventory custodians. Financial officers should participate
directly in the planning, performance, and review of physical
counts to ensure independence in the determination of quantities,
physical condition, and values of inventories.
(a) Inventories of materiel may be accounted for at cost by
the following methods:
- Establishing what direct and indirect expenses are to be
included in or excluded from cost. For example, the cost of goods
in a warehouse may be recorded at the price paid to the supplier
or may include shipping, handling, and warehousing costs.
- Establishing how costs are to be allocated to individual
items in inventory. For example, costs may be recorded on a
specific, average, or standard basis.
(b) A standard costing system is recommended for most
applications because it provides a good basis for financial
control; serves the needs of those responsible for the materiel
management function; and does not require complex accounting
methods.
(c) In this system, materiel acquisitions are recorded in the
control account and subsidiary system at standard cost, with any
resulting differences in the purchase price and shipping costs
being recorded in a separate account. The balance in this
separate account will represent accumulated price variances for
each category of item, an analysis of which may disclose
unrealistic standards, or favourable or unfavourable purchasing
arrangements in the period. Issues from inventory to operations
are also recorded at standard cost. At any point in time the
total standard cost of all physical inventories on hand should be
equal to the balances in the subsidiary accounting system and to
the total in the control account. When standard costing is used,
the standards should be realistically determined. Established
standards should be reassessed on a systematic basis once each
year or, if appropriate, on an exception basis during the year.
When a new standard is introduced, existing inventories should be
revalued and the applicable adjustment should be recorded in the
accounts.
A work-in-process system should be used to determine the costs
of manufacturing or processing operations. In such a system
labour and raw-material costs are identified in relation to
individual operations or projects, and other costs are allocated
on an appropriate basis. Separate control accounts are operated
for each cost component. These act as clearing accounts for
inventories of work in process; they are charged with raw
materials, labour, and other costs as they are entered into the
productive process and are relieved of these costs as products
are completed and transferred to finished-product inventories.
Separate control accounts are also maintained for raw materials
and finished products. This enables accurate costs to be
determined on a period-by-period basis and permits the investment
in raw materials, work in process, and finished goods to be
controlled.
The following sets out certain accounting principles with
respect to equipment that should be adhered to by all
departments:
(a) "While in inventory, equipment should be accounted for in
the same manner as other items. Once issued for use, central
records should be maintained to reflect distribution either
geographically or by individual operating units.
(b) "To preserve the continuity of responsibility for
equipment in use, operating units should maintain records of the
internal distribution of equipment."
(c) There should be adequate accounting controls over the
equipment records to ensure that they are complete and accurate.
This includes maintaining a direct link with the principal
departmental accounting system to ensure that all assets acquired
and processed through the cash records are also included in the
equipment records. For example, the total-dollar values of
purchases as recorded in the equipment records should be
reconciled with appropriate line-object totals created for that
purpose in the classification of accounts and shown in financial
reports. This would require a minimum of extra work, since
computer reports that summarize the data in a useful way could be
developed easily. As a minimum standard, when it is not practical
to maintain dollar values in the detailed equipment records, no
cheque requisition with respect to equipment should be processed
unless it bears evidence that the item has been entered into the
equipment records.
(d) It should not always be necessary to integrate equipment
records fully into the departmental accounting system, but
information with respect to the total cost of equipment on hand
at a responsibility centre should be available on request. There
are circumstances, however, when it would be useful to report
information on equipment by memorandum in departmental financial
reporting systems. This may include a monthly or annual
depreciation charge to allocate the cost of each item of
equipment over its useful life and to provide an estimate of the
current depreciated value of each item or of the total equipment
on hand. Such depreciation charges should be equitably computed
and consistently applied for each individual item or for each
class of item, based on usage statistics or on a straight time
consideration.
(e) When it is desired to integrate equipment records with the
principal accounting system, this can be done through the use of
contra accounts.
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