(24) Inventories
Accounting and measurement policies
Inventories
In addition to directly attributable unit costs, the cost of sales also includes overheads attributable to the production process, which are determined on the basis of normal capacity utilization of the production facilities. Goods for resale are recognized at cost. When determining amortized cost, the “first-in, first-out” (FIFO) and weighted average cost formulas are used.
Inventories are tested for impairment using a business sector-specific method. Under this method, cost is compared to the net realizable values. The net realizable value corresponds to the expected sale proceeds less any costs for completing and distributing the product. If the net realizable value is lower than the amortized cost, the asset is written down by a corresponding amount which is recognized as an expense in the cost of sales.
In addition to the impairment derived from the sales market, impairment losses may also be necessary for quality reasons or due to a lack of usability of the items, or their remaining shelf life. If the reason for impairment no longer applies, the carrying amount is adjusted to the lower of cost and the applicable new net realizable value.
Since inventories are for the most part not manufactured within the scope of long-term production processes, borrowing costs are not included.
Inventory prepayments are recognized under other non-financial assets.
Significant discretionary decisions and sources of estimation uncertainty
Identification of impairment losses or reversal of impairment losses
Discretionary decisions are required in the identification of impairment as well as in identifying the need to reverse impairment of inventories. There are estimation uncertainties with respect to the calculation of the net realizable value. In particular, changes in selling prices and expected costs of completion are considered in calculating this value.
Inventories consisted of the following:
€ million |
|
Dec. 31, 2020 |
|
Dec. 31, 2019 |
|---|---|---|---|---|
Raw materials and supplies |
|
633 |
|
622 |
Work in progress |
|
905 |
|
943 |
Finished goods/goods for resale |
|
1,756 |
|
1,776 |
Inventories |
|
3,294 |
|
3,342 |
The reduction of the inventories versus the previous year was primarily driven by the stock decrease of the unfinished-, as well as finished goods and merchandise. While in the Healthcare business sector a slight build-up occurred to ensure the supply demand, in the Display Solutions business unit of the Performance Materials sector, the changes in the market demand patterns led to a stock decrease.
Impairment losses on inventories amounted to € 545 million as of December 31, 2020 (December 31, 2019: € 526 million). Impairment losses that are included in the cost of sales are shown in Note (10) "Cost of sales".
As of the balance sheet date, no inventories were pledged as security for liabilities.