Inventory is a crucial component in preparing financial statements for any business, whether manufacturing, wholesale, or retail. Inventory impacts the cost of goods sold, net profit, and overall financial position. The choice of inventory accounting method, such as the First-In, First-Out (FIFO) method or the Weighted Average method directly affects the measurement of a business’s performance.

However, there may be situations where a business deems it necessary to change its inventory recording methods during the year. This constitutes a change to “accounting policy” that requires careful consideration in accounting professionalism, tax law, and disclosure requirements.

1. What is a change in accounting policy?

A change in accounting policy means that a business adopts a new accounting policy instead of its previous one. For example, switching from the FIFO method to the Weighted Average method to measuring the value of inventory.

Relevant Accounting Standards:

• Accounting Standard No. 2: Inventories
• Accounting Standard No. 8: Accounting Policies, Changes in Accounting Estimates and Errors

These standards stipulate that a changes in accounting policies can be made if:

• There is a requirement in the new standard or,
• It makes accounting information “more appropriate and reliable.”

In other words, the change must have a clear justification, not simply for tax benefits or short-term accounting profits.

2. Example of a change: From FIFO to Weighted Average

The FIFO method assumes that items purchased first are sold first.

The Weighted Average method uses the average cost of all goods to calculate the cost of goods sold. If a business considers that the FIFO method does not reflect the true cost, such as in a situation where product prices change rapidly or are highly volatile, it may consider changing to the Weighted Average method to better reflect the true cost.

3. Steps to be process

3.1 Prepare supporting documentation for the change:

• Report analyzing the impact of the change in accounting method (e.g., on net profit, inventory and cost of goods sold)
• Document summarizing the reasons for the change
• Board/management resolution approving the change

3.2 Retrospective adjustment of accounting entries (if possible)

TAS 8; states that if there is a change in accounting policy, the entity should:

• Adjust the financial statements of the previous year to reflect the new policy for comparability.
• If retrospective adjustment is not possible, disclose the reasons and methods for managing the impact.

     3.3 Disclosure of information in the financial statements:

• Indicate that there has been a change in accounting policy regarding inventory.
• Provide information on the quantitative impact of the change.
• State the reasons why the change will make the information more appropriate and

    reliable.

4. Tax Implications

Although changing the inventory calculation method is an accounting matter, it can affect net profit, which is the basis for calculating corporate income tax.

Tax law guidelines:

• The change should be reported to the tax registrar of the Revenue Department or indicated in the notes accompanying Form P.N.D. 50.

• Failure to reported and a change in method affecting taxes may be interpreted as tax evasion.

• The Revenue Department may conduct a retrospective audit and there is a risk of fines or penalties.

Therefore, it is advisable to consult carefully with your auditor and tax department before proceeding.

5. Additional Recommendations

•  Plan ahead: Avoid making policy changes during the year without prior analysis.
•  Be prepared for audits: Ensure you have complete supporting evidence, including internal documents and adjusted accounting entries.
•  Be transparent: Financial statements must clearly disclose changes to avoid misunderstandings.
•  Assess the impact on stakeholders: Consider concerns from investors, creditors, or auditors who may have questions about the consistency of accounting policies.

      Summary

Changes in inventory accounting policy, such as shifting from the FIFO method to the Weighted Average method are significant and impact both accounting and tax aspects. Therefore, businesses should implement these changes systematically, with clear justifications, and strictly adhere to accounting standards and tax laws to maintain the reliability of financial statements and reduce future tax risks.

Author: Soraya Tintasuwan

Managing Director Dharmniti Auditing Co., Ltd.