Changes in inventories
Concept
10.110 Changes in inventories are measured by the value of the entries into inventories less the value of withdrawals and less the value of any recurrent losses of goods held in inventories during the accounting period.
10.111 Changes in inventories are defined to include changes in holdings of:
- goods for sale, whether of own production or purchased for resale;
- work-in-progress; and
- raw materials and stores to be used as intermediate inputs into production.
10.112 It should be noted that work-in-progress on cultivated biological resources is recorded for single use resources only, that is, plants, trees and livestock that produce an output once only (e.g. when the plants and trees are cut down or uprooted or the livestock slaughtered). For repeat yield resources (e.g. livestock producing milk, wool, etc. and fruit and nut trees), that are cultivated on own account or under an agreed contract with another enterprise, the growth is counted as fixed capital formation and is excluded from inventories. Any remaining cultivation of resources with repeat yields, such as nurseries and breeding of racehorses, is treated as work-in-progress.
10.113 Work which has commenced and is ongoing for structures, including dwellings, and on other forms of construction (e.g. roads, dams, ports) is excluded from inventories and included in GFCF. However, work on incomplete heavy machinery and equipment (e.g. shipbuilding) is included in changes in inventories. Land and financial assets are not regarded as inventories.
Valuation of changes in inventories
10.114 The value of inventories recorded in business accounts at the end of each accounting period is known as the book value. Period to period changes in the book value of inventories can be calculated by deducting the book value of inventories at the end of the previous accounting period from the book value at the end of the current accounting period.
10.115 For national accounting purposes, the physical changes in inventories during a period should be valued at the prices prevailing at the time that inventory change occurs. Therefore, the goods transferred out of inventories (i.e. raw materials and stores) are valued at purchasers' prices current at the time of the withdrawal from inventories. Finished goods transferred into inventories are valued as if they were sold at that time and additions to work-in-progress are given the value they have at the time they are added to inventories.
10.116 In practice, many businesses adopt historical cost measurement whereby inventories are valued at the lower of cost or market prices. Beginning-of-period inventories are valued at costs or prices prevailing at the beginning of the accounting period, and end-of-period inventories are valued at costs or prices prevailing at the end of the period. As a result, in periods of rising prices the book value of inventories will frequently include an element of capital gain, even if there has been no change in the physical quantity of inventories held. Conversely, if prices are falling, the book value of inventories will include an element of capital loss even with no change in the quantity of inventories on hand. Therefore, in times of rising prices, the change in the book value measured on a historical cost basis will include both the value of the physical increase or decrease in inventories and an increase in value due to the effect of rising prices on the value of inventories held. The latter effect is an element of holding gain (or holding loss if prices are falling), which should be excluded from changes in inventories and included in revaluations.
10.117 In the ASNA, an inventory valuation adjustment (IVA) is made to remove the effects of such gains or losses from book values of changes in inventories. As initial estimates of gross operating surplus incorporate the effect of the value of inventories derived on a historical cost basis, the IVA is also deducted from those estimates.
10.118 There are several methods used to measure inventories in business accounts. These include:
- First in first out (FIFO) – items held in store for the longest time are assumed to be the first to be drawn from store, so that inventories will consist of the most recently acquired items.
- Last in first out (LIFO) – this system uses the opposite assumption to FIFO. The most recently acquired items are assumed to be the first drawn from store, so that inventories consist of the items first purchased.
- Historical cost – inventories are valued at the actual cost of acquisition, with no allowance for inflation.
- Current cost – inventories are valued at replacement cost, rather than the cost of acquisition. This measure is generally derived by adjusting values obtained under historical cost for the effect of inflation.
- Average cost – running totals are held of the value and volume of inventories. The average price of goods held in inventories is recalculated periodically; for example, when new goods are received. Any subsequent withdrawal from inventories is then made at that price until the average is recalculated.
- Standard cost – under a standard cost system, items held in stock are each given a unit value, which may be based on recent costs, current costs, or expected future costs. Once this standard has been set, the value of a company's inventories is determined by multiplying the quantity of each commodity in stock by its standard cost. The standard is generally maintained for a fixed period (usually a company's financial year), or until changing prices make the standard inappropriate for current conditions.
10.119 The current methodology underlying the derivation of the IVA in the ASNA assumes that businesses generally value their inventories at historical cost and employ the FIFO method of handling inventories.
10.120 In general, the IVA is calculated in three basic steps:
- an estimate is made of the value of inventories at constant prices at the end of each quarter by revaluing end of quarter book values to base year prices using price indexes; the value of changes in inventories at constant prices is then derived as the difference between successive end of quarter levels;
- the estimates of the values of changes in inventories at constant prices are multiplied by price indexes that reflect current quarter average prices; this calculation gives an estimate of the physical change in inventories at average current quarter prices; and
- the IVA is the difference between the value of changes in the book value of inventories obtained from business accounting records and the value of changes in inventories estimated in 2.
10.121 The following table illustrates how the IVA is calculated by way of an example.
| (1) Change in book value | |||
|---|---|---|---|
| Book value of inventories at end of quarter (t) | = | 51,000 | |
| Book value of inventories at end of quarter (t+1) | = | 55,056 | |
| Change in book value | = | 4,056 | |
| Base of price index | = | 100 | |
| Price index at end of quarter (t) | = | 120 | |
| Price index at end of quarter (t+1) | = | 124 | |
| Average price index for quarter (t+1) | = | 122 | |
| (2) Revaluation to constant prices | |||
| Constant price level | book value ÷ price index x 100 | ||
| End quarter (t) | 51,000 ÷ 120 x 100 | 42,500 | |
| End quarter (t+1) | 55,056 ÷ 124 x 100 | 44,400 | |
| Constant price change in inventories | 44,400- 42,500 | 1,900< | |
| (3) Revaluation to current quarter prices | |||
| Change in inventories at current quarter prices | = | change at constant prices x average price index for current quarter ÷ 100 | |
| = | 1,900 x 122 ÷ 100 | ||
| = | 2,318 | ||
| (4) Derivation of the IVA | |||
| IVA | = | change in book value - physical change at current quarter prices | |
| = | 4,056 - 2,318 | ||
| = | 1,738 | ||
10.122 Beside the assumption that book values are based on historical cost and FIFO conventions, the method used to estimate the IVA rests on four other assumptions:
- sales prices for finished goods held in inventories can be used to adjust inventory levels valued at cost; that is, the selling price of finished goods is established as a fixed mark-up on the costs incurred in the current quarter;
- each commodity (or group of commodities) held in inventories has a fixed turnover period; that is, the ratios 'inventory level of materials to value of purchases' and 'inventory level of finished goods to value of sales' remain constant for each commodity;
- the commodity composition of inventories held by any particular industry remains fixed; and
- the rate of physical increase (or decrease) in inventories is constant throughout the quarter.
Sources and methods - Annual
Benchmark years
10.123 Annual S-U benchmarks for change in inventories are economy-wide and are not split by industry or sector. Unbenchmarked values of changes in inventories are calculated from quarterly data for three sectors: private non-farm; farm; and public authorities. The sources and methods relating to calculation of the total changes in inventories (i.e. the S-U benchmarks) and each of the sectoral categories (including how they are benchmarked to the S-U benchmark) are discussed in the tables that follow.
| Item | Comment |
|---|---|
| Current price | |
| The Economic Activity Survey (EAS) is the source for the private sector as well as public non-financial corporations. EAS provides the following data:
Government Finance Statistics is the source for the general government sector changes in inventories. It provides changes in inventories in total which is allocated to industry in proportion to government output. Changes in inventories of raw materials are classified to the IOPC level by applying the proportion of the inventory products of intermediate use from the input and output tables to the total changes in inventories of raw materials. Changes in inventories of work-in-progress and finished goods for all industries are classified to the IOPC level by applying the proportion of the inventory products of supply from the input and output tables to the total changes in inventories of work-in-progress and finished goods. The IOPC level data for all changes in inventories components are aggregated to the Supply-Use Product Classification (SUPC) level. Supply and Use balancing process The inventories’ estimates at the SUPC level, are inserted into the Use table which is balanced with the Supply table at the product level using the product flow method. Therefore, adjustments are likely to be applied to the initial inventories estimate to obtain a balance between supply and use. The adjustments are determined by confronting the supply and use data with industry association data, annual reports of significant units within the industry, as well as other relevant ABS survey results. For more information on the product flow method refer to Chapter 7. |
| Chain volume measures | |
| Current price estimates of inventories at the IOPC level are deflated using the supply deflator for that IOPC. | |
| Item | Comment |
|---|---|
| Current price | |
| The difference between the annual S-U benchmark for changes in inventories and the sum of the unbenchmarked quarterly estimates for each year is derived. This difference is then prorated across the following categories of private non-farm change in inventories: mining, manufacturing, wholesale trade and retail trade. | |
| Chain volume measures | |
| The most successful means of deriving chain volume changes in inventories has been found to be differencing chained estimates of the levels. The steps involved are as follows:
The price indexes that are used to re-value book value levels of inventories are formed by weighting together component price indexes from ABS publications: Consumer Price Index, Australia; Producer Price Indexes, Australia; and International Trade Price Indexes, Australia. The regimen and weights for these price and wage price indexes are derived using data from the various censuses and surveys conducted by the ABS. Chain volume estimates of changes in private non-farm inventories are published in the following detail in the national accounts:
It is noteworthy that, unlike other national accounts aggregates, quarterly chaining and annual chaining of volumes of changes in inventories produce identical annual chain volume estimates of changes in inventories. This is because chain volume estimates of changes in inventories are derived by differencing the chain volume estimates of the levels of inventories which relate to the end of quarterly and annual periods and coincide for the June quarter. |
| Item | Comment |
|---|---|
| Current price | |
| Changes in farm inventories include changes in:
Annual changes in the book value of inventories of wool are estimated as the difference between inventory levels based on available information obtained from the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), Australian Wool Exchange (AWEX), and various ABS agricultural statistics. Annual changes in the book value of inventories of apples and pears are estimated as the difference between inventory levels, which was modelled from data provided by the Tasmanian Department of Primary Industries, Parks, Water and Environment. Annual changes in the book value of inventories of grain crops held on farms are derived as the difference between the value of production and disposals; that is, exports and domestic usage of the various commodities. Annual values of gross value of farm production of crops are obtained from the ABS publication, Value of Agricultural Commodities Produced, Australia and ABARES publication, Agricultural Commodities. Disposals are estimated from export statistics, estimates of seed purchased or retained on farms for use as seed or fodder, and materials used in manufacturing statistics, which are modelled from data obtained from the ABS publications, International Trade in Goods and Services, Australia, Value of Agricultural Commodities Produced, Australia and the Quarterly Business Indicators Survey. Although exports data are available quarterly from ABS trade statistics, various indicators must be used to derive quarterly data relating to production of grain crops. For example, annual data on gross value of production and on seed and fodder use are allocated to quarters according to fixed proportions based on harvest and planting seasons and assumed seasonal requirements for fodder. Animals reared for slaughter are regarded as work-in-progress. The estimates are derived from numbers of animals collected annually by the ABS, and prices from the Australian Bureau of Agricultural and Resource Economics and Sciences. Animals reared for breeding purposes or recurrent production (such as dairy cattle and sheep reared for wool production) are regarded as gross fixed capital formation. |
| Chain volume measures | |
| The techniques used to calculate chain volume estimates of changes in farm inventories are only slightly different to those shown above for private non-farm inventories. The difference is that for many of the detailed components of the former it is difficult to obtain true book value levels of inventories. Therefore, constant price estimates of changes in inventories that preceded the introduction of chain volume estimates are used in the calculations. The steps followed are:
For farm commodities, the price indexes used to convert constant price levels into levels valued in the prices of the previous year are calculated using production unit values. |
| Item | Comment |
|---|---|
| Current price | |
| Changes in public authorities’ inventories include estimates for general government, public non-financial corporations and public financial corporations. Recorded inventories include demonetised gold transactions (gold sales and gold loans) by the Reserve Bank of Australia and the construction of military equipment for export. Annual estimates of changes in the current price value of other public authorities’ inventories are derived from information in the annual ABS Government Finance Statistics. They are derived from a detailed analysis of annual reports and Auditors-General Reports, together with Commonwealth and State government budget papers and other financial statements. |
| Chain volume measures | |
| The techniques used to calculate chain volume estimates of changes in public authorities’ inventories are only slightly different to those shown above for private non-farm inventories. The difference is that for many of the detailed components of the former it is difficult to obtain true book value levels. Use is therefore made of the constant price estimates of changes in inventories that preceded the introduction of chain volume estimates and which are still calculated. The steps followed are:
For the other public authorities’ inventories component, a price index is constructed in a similar way to that described above for private non-farm inventories. |
Latest year
10.124 Latest year annual estimates of the changes in inventories are essentially an aggregation of the quarterly estimates.
10.125 Current price changes in inventories data are further disaggregated by institutional sector, with results published in the annual sectoral capital accounts in Australian System of National Accounts. General government and public non-financial corporation’s annual estimates for changes in inventories are derived from Government Finance Statistics. Private non-financial sector estimates are derived internally from quarterly data used to compile estimates for private non-farm and farm inventories. Estimates for financial corporations are based on data on transactions in non-monetary gold provided by the Reserve Bank of Australia; the assumption being that inventories for private financial corporations are relatively small. A ratio split is calculated for incorporated and unincorporated entities when deriving changes in inventories for the household sector.
Sources and methods - Quarterly
10.126 Quarterly estimates for change in inventories are aligned to annual benchmarks by calculating the difference between the annual economy-wide benchmark and the sum of the unbenchmarked quarterly estimates for each year, and prorating the difference across the following categories of private non-farm change in inventories: mining, manufacturing, wholesale trade, and retail trade. Quarterly changes in inventories for other private non-farm, farm, and public authorities are not adjusted as part of the annual benchmarking process. A quarterly value of the changes in inventories is obtained by deducting the IVA from the corresponding quarterly value of the changes in the book value of inventories.
10.127 The quarterly values of changes in inventories are calculated separately for three sectors: private non-farm; farm; and public authorities. The sources and methods relating to each of these sectoral categories and the IVA are discussed in the tables that follow
| Item | Comment |
|---|---|
| Current price | |
| The Quarterly Business Indicators Survey provides the data for estimating changes in private non-farm inventories. This survey collects estimates of the closing book value level of inventories from which changes are derived. The levels are also used in deriving the estimates of the inventories to sales ratio that is published in the quarterly national accounts. The Quarterly Business Indicators Survey provides the quarterly movements in inventories for mining; manufacturing; wholesale trade; retail trade; electricity, gas; water and waste services; accommodation and food services; and telecommunication services. The survey does not include some non-farm industries with only minor inventory holdings. For these industries, data are modelled from historical data, which was compiled from the periodic economic censuses and Taxation Statistics using the estimates for in-scope industries. |
| Chain price volume | |
| The most successful means of deriving chain volume changes in inventories has been found to be differencing chained estimates of the levels. The steps involved are as follows:
The price indexes that are used to re-value book value levels of inventories are formed by weighting together component price indexes from ABS publications: Consumer Price Index, Australia; Producer Price Indexes, Australia; and International Trade Price Indexes, Australia; and wage rate indexes from the publication, Wage Price Index, Australia. The regimen and weights for these price and wage rate indexes are derived using data from the various censuses and surveys conducted by the ABS. Chain volume estimates of changes in private non-farm inventories are published in the following detail in the national accounts:
It is noteworthy that, unlike other national accounts aggregates, quarterly chaining and annual chaining of volumes of changes in inventories produce identical annual chain volume estimates of changes in inventories. This is because chain volume estimates of changes in inventories are derived by differencing the chain volume estimates of the levels of inventories which relate to the end of quarterly and annual periods and coincide for the June quarter. |
| Item | Comment |
|---|---|
| Current price | |
| Changes in farm inventories include changes in:
Quarterly changes in the book value of inventories of wool are estimated as the difference between inventory levels derived from available information obtained from the ABARES publication, Agricultural Commodities; the Australian Wool Exchange; and from ABS publications, Value of Agricultural Commodities Produced, Australia and Livestock Products, Australia. Quarterly changes in the book value of inventories of apples and pears are estimated as the difference between inventory levels, which was modelled from historical data, provided monthly by the Tasmanian Department of Primary Industries, Parks, Water and Environment. Animals reared for slaughter are regarded as work-in-progress. The estimates are derived from numbers of animals collected annually by the ABS, and prices from the Australian Bureau of Agricultural and Resource Economics and Sciences. Animals reared for breeding purposes or recurrent production (such as dairy cattle and sheep reared for wool production) are treated as gross fixed capital formation. |
| Chain volume measures | |
| The techniques used to calculate chain volume estimates of changes in farm inventories are only slightly different to those shown above for private non-farm inventories. The difference is that for many of the detailed components of the former it is difficult to obtain true book value levels. Therefore, constant price estimates of changes in inventories that preceded the introduction of chain volume estimates are used in the calculations. The steps followed are:
For farm commodities, the price indexes used to convert constant price levels into levels valued in the prices of the previous year are calculated using production unit values. |
| Item | Comment |
|---|---|
| Current price | |
| Changes in public authorities’ inventories include estimates for general government, public non-financial corporations and public financial corporations. Quarterly estimates of changes in the book value of marketing authorities’ inventories are derived from information supplied by the authorities concerned. Recorded inventories include demonetised gold transactions (gold sales and gold loans) by the Reserve Bank of Australia and the construction of military equipment for export. Quarterly data are obtained from ABS Government Finance Statistics and Balance of Payments quarterly collections covering all significant public corporations/organisations and from the Department of Finance’s Quarterly Ledger. |
| Chain volume measures | |
| The techniques used to calculate chain volume estimates of changes in public authorities’ inventories are only slightly different to those shown above for private non-farm inventories. The difference is that for many of the detailed components of the former it is difficult to obtain true book value levels. Use is therefore made of the constant price estimates of changes in inventories that preceded the introduction of chain volume estimates and which are still calculated. The steps followed are:
For the other public authorities’ inventories component, a price index is constructed in a similar way to that described above for private non-farm inventories. |
10.128 The IVA is compiled each quarter from survey information, and annual estimates are derived by aggregating the quarterly estimates. The sources and methods relating to each of the major sectoral categories are discussed below.
| Item | Comment |
|---|---|
| Non-farm inventories | |
| The book values of private non-farm inventories are disaggregated into 30 industry groups: mining; 15 groups within manufacturing; eight within wholesale trade; retail trade; accommodation and food services; electricity; gas; water and waste services; construction; transport and storage; and telecommunication services. The inventories held by manufacturing industries are further split into Materials, and work-in-progress or finished goods. An IVA is derived using the assumptions described in above paragraphs. |
| Farm inventories | |
| An IVA is generally not necessary for farm inventories because the values of changes in inventories at average current quarter prices can be estimated directly from detailed quantity and price data. However, the value of changes in inventories for wheat and wool is calculated by subtracting from their respective sales the value of receivals. A production valuation adjustment (PVA) was previously required for the estimates of changes in inventories of wheat (ceased in June quarter 2010) and wool (ceased in March quarter 2011). This was due to the differences in current quarter sale price and the price at which receivals were valued. The PVA adjustment was deducted from the value of the receivals when calculating gross value of farm production (estimated in deriving farm income) on a national account’s basis. |
| Public authorities’ inventories | |
| Due to the relatively low level of inventories and the lack of information on the commodity dissection involved, and the fact that source data are already in current prices, no IVA is calculated for other public authorities’ inventories. | |