Direct answer: Under Chinese Accounting Standards (CAS), inventory is initially measured at cost, which includes purchase price, import duties, transport, handling and other directly attributable costs. Subsequent measurement uses the lower of cost and net realisable value. CAS allows FIFO, weighted-average and specific-identification methods. Unlike IFRS, CAS generally does not permit the reversal of an inventory write-down once it has been recognised.
1. What is included in inventory cost
The cost of inventory under CAS includes all expenditures necessary to bring the goods to their present location and condition. Typical components are:
- Purchase price: the invoice amount before discounts.
- Import duties and non-recoverable taxes: customs duties and other levies that cannot be credited.
- Freight, insurance and handling: inbound transport and related costs.
- Conversion costs: direct labour and allocated manufacturing overheads for produced goods.
- Less: trade discounts, rebates and recoverable VAT input.
Abnormal waste, storage costs that are not part of production, and administrative overheads are generally excluded from inventory cost.
2. Permitted costing methods
CAS permits several costing methods, and the method chosen should reflect the actual flow of goods and be applied consistently. Common choices include:
| Method | When it fits | CAS treatment |
|---|---|---|
| First-in, first-out (FIFO) | Prices are rising or goods are perishable | Permitted; older costs flow to cost of sales first |
| Weighted average | Large volumes of similar items | Permitted; recalculated periodically or at each receipt |
| Specific identification | High-value, unique items | Permitted; tracks actual cost of each unit |
| LIFO | Rarely suitable | Not permitted under CAS |
Changing the costing method is allowed only if it provides more reliable and relevant information, and the change must be disclosed.
3. Net realisable value and impairment
At each reporting date, inventory must be measured at the lower of cost and net realisable value (NRV). NRV is the estimated selling price less estimated costs of completion and disposal. If NRV falls below cost, the inventory is written down and an impairment loss is recognised.
Common triggers for a write-down include:
- Physical damage or obsolescence.
- Falling market prices.
- Changed product specifications.
- Expired or slow-moving stock.
- Order cancellations.
4. CAS vs IFRS on reversal
A key difference between CAS and IFRS is the treatment of a write-down reversal. IFRS allows a reversal if the NRV of inventory recovers, limited to the original write-down amount. CAS generally does not permit the reversal of inventory impairment losses. This can create permanent differences in reported profit and tax bases, and it must be tracked carefully for group reporting.
5. Practical steps for inventory accounting
- Choose a costing method. Document the rationale and apply it consistently.
- Track costs accurately. Separate product costs from period costs and abnormal losses.
- Count inventory regularly. Reconcile physical counts to the ledger at least annually.
- Assess NRV each period. Document market evidence for any write-down.
- Do not reverse CAS write-downs. Record any recovery only when the goods are sold.
- Disclose methods and changes. Financial statement notes should explain policies and significant judgments.
6. Where Caigeek fits
Caigeek helps foreign companies in China set up inventory costing workflows, reconcile warehouse data with the general ledger, and prepare inventory schedules for monthly closing and annual audit. We do not provide audit opinions or accounting-standard interpretations; those remain with licensed CPA firms.
Frequently asked questions
1. What costs are included in inventory under CAS?
Inventory cost includes purchase price, import duties, non-recoverable taxes, inbound freight and handling, and conversion costs, less discounts and recoverable VAT.
2. Which inventory costing methods are allowed under CAS?
CAS permits FIFO, weighted average and specific identification. LIFO is not allowed.
3. How is inventory impairment measured under CAS?
Inventory is measured at the lower of cost and net realisable value. If NRV falls below cost, a write-down is recognised.
4. Can an inventory write-down be reversed under CAS?
No. CAS generally does not permit the reversal of inventory impairment losses, unlike IFRS.
5. What is net realisable value?
NRV is the estimated selling price minus estimated costs to complete and sell the inventory.
6. How often should inventory be counted?
A physical count should normally be performed at least once a year and reconciled to the accounting records.
7. Does CAS require disclosure of inventory policies?
Yes. Companies must disclose the costing method, valuation policy and any significant changes in estimates or methods.
Important notes
This article provides general finance-management and compliance information for foreign companies operating in China. It is not accounting, tax, legal, audit or investment advice for a specific company. Rules and deadlines should be confirmed with the local tax bureau, market regulation department and a licensed professional adviser.