Inventories, including mandatory reserves comprise products, semi-finished products and work in progress, merchandise and materials.
Finished goods, semi-finished products and work in progress are measured initially at production cost. Production costs include costs of materials and costs of conversion for the production period of finished goods, semi-finished products as well as work in progress and systematic allocation of fixed and variable production overheads estimated for its normal level.
Finished goods, semi-finished products and work in progress shall be measured at the end of the reporting period at the lower of cost or net realizable value. Cost flows of finished goods, semi-finished products and work in progress are determined based on the weighted average cost of production.
Merchandise and materials are measured initially at acquisition cost, while as at the end of the reporting period merchandise and raw materials are measured at the lower of cost or net realizable value. Cost flows of merchandise and raw materials are determined based on the weighted average acquisition cost.
The initial value of inventories is adjusted for their profits or losses from settlement of cash flow hedging instruments.
Impairment tests for specific items of inventories are carried out at the end of each month. Write-down to net realizable value concerns inventories that are damaged or obsolete and the selling price have fallen. Raw materials held for use in the production are not written down below acquisition or production cost if the products in which they will be incorporated are expected to be sold at or above cost.
However, when a decline in the price of materials indicates that the cost of the products exceeds net realizable value, the materials are written down to net realizable value. Recognition and reversal of impairment allowances of inventories is recognised in cost of sales.
The Group determines the inventory impairment allowances based on estimation of the net realizable values considering the most recent sales prices at the moment of estimations.
| 31/12/2019 | 31/12/2018 | |
|---|---|---|
| Raw materials | 8,673 | 8,330 |
| Semi – finished goods and work in progress | 1,245 | 1,403 |
| Finished goods | 4,474 | 4,012 |
| Merchandise | 682 | 617 |
| Inventories, net | 15,074 | 14,362 |
| Impairment allowances of inventories to net realisable value | 235 | 301 |
| Inventories, gross | 15,309 | 14,663 |
The main item of inventories, which turnover period is longer than 12 months after the end of the reporting period are mandatory reserves. As at 31 December 2019 and as at 31 December 2018 the value of mandatory reserves presented in consolidated financial statements amounted to PLN 6,133 million and PLN 5,607 million, respectively.
Change in impairment allowances of inventories to net realizable value
| 2019 | 2018 | |
|---|---|---|
| At the beginning of the period | 301 | 134 |
| Recognition | 284 | 215 |
| Reversal | (111) | (26) |
| Usage | (240) | (29) |
| Foreign exchange differences | 1 | 7 |
| 235 | 301 |
In 2019 and 2018 the recognition and reversal of net impairment allowances of inventories to net realizable value related mainly to the downstream segment and amounted to PLN (173) million and PLN (189) million, respectively.