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Inventory Management
1.0 Description
This section introduces prescriptive content regarding the inventory management for various types of inventories throughout UNDP.
This section covers acquisition, inventory in, inventory out, physical count, valuation, inventories in transit, accounting and reporting of Inventories. It aims to ensure that the inventory items owned and controlled by UNDP are properly identified, consistently and uniformly classified, as well as timely recorded and reported with sufficient supporting documentation. It also aims to ensure accurate recognition of expenses incurred and recording of assets held by UNDP, as well as proper reporting of funds utilized but not yet expensed.  
For the purpose of these guidelines:
Inventories are defined as assets in the forms of materials or supplies to be consumed or distributed in the rendering of services (i.e. through implementation of UNDP programmes), or materials or supplies held for sale or distribution in the ordinary course of operations.
Periodic inventory method is a method of inventory valuation for financial reporting purpose in which inventories are initially expensed when procured. Physical inventory count is performed at regular intervals (e.g. quarter end) to determine the quantity of inventories on hand at period end. Once the quantities are determined, they are valued and recorded as assets (i.e. inventories) by reducing the corresponding periodic expense with the same amount.
First in, first out (FIFO) is an asset management technique and valuation method in which the assets acquired first are recorded as if issued / distributed first. It does not necessarily mean that the specific oldest physical object is tracked and sold first.
Net realizable value is the estimated selling price in the ordinary course of operations, less the estimated costs of completion and the estimated costs necessary to make the sale, exchange, or distribution.
Current replacement cost is an amount it would cost in the ordinary course of transaction to replace an asset at current market price.
Fair value is an amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in the ordinary course of transaction.
Document Management System (DMS) is system located on the Intranet and can be reached via the OFA website. Users will find a list of Procedures which they can select and navigate to a form where they provide the details of their request and to which they must attach the required documents.  Following submission of the form(s), workflows associated with these tasks are automated to ensure appropriate controls, approvals and routing of documentation, as well as regarding service requests to enable the maintenance of their status by CO’s and HQ units. For Inventory Management, DMS serves as document depository which holds Inventory Control Reports and Certifications.

2.0 Relevant Policies
·         UNDP Financial Regulations and Rules : Article 24 Management of supplies, property, plant and equipment and other assets
·         Guidelines for the Storage of Essential Medicines and Other Health Commodities issued by World Health Organization ( WHO)
·         Guidance on inventory acquisition / management by UNDP Procurement Support Office, HQ
UNDP Inventories policy requires qualified inventories to be recognized as assets until consumed or distributed. The balance of such inventories have to be physically counted, valued, recognized and reported as assets at the end of each reporting quarter.
In general, the determination of items to be included in the inventories is based on the ownership of the inventories, i.e. the legal title to the inventories. However, the notion of “control” is central to UNDP’s inventories policy in order to recognize inventories as assets. UNDP must examine the substance of the transaction, rather than the form of the agreement with other parties, and ensure that the control is demonstrated before recognizing and reporting inventories as assets. The physical location or custody of the inventories are factors to consider in determining control (i.e. whether they are stored on UNDP premises, or managed by UNDP personnel), but these factors are not by themselves sufficient criteria to identify who controls the inventories. UNDP must take into account the risks and rewards of ownership (including the agreement with, or expectation of, donors) to determine whether the inventories are to be recognized as assets in UNDP’s accounts. UNDP must recognize the inventories if UNDP:
a).   Controls access to and distribution of the inventory items;
b).   Administers a programme requiring distribution of the inventory items (as opposed to situations where the inventory items are purchased solely for immediate shipment to a local government / implementing partner).
c).   Bears the risks of loss, theft, damage, spoilage, etc.
Supplies (e.g. office supplies, stationery, etc.) are items that purchased and consumed for administrative use which are used to assist daily operation of COs rather than for direct implementation of a programme. Supplies are generally expensed upon acquisition and are immaterial in value.
Examples for inventories
Examples for supplies
Global Fund medical supplies / equipment
Medical supplies procured for UN dispensary
Crisis supplies / equipment
Regular office stationery
Electoral supplies / equipment
Machinery spare parts stored for UNDP daily operations
Items prepositioned for emergencies by a programme under its mandate
Items prepositioned for emergencies in UNDP office
Fuel held for distribution to other UN agencies
Fuel held for UNDP’s office usage and vehicles
Publications held for sale or distribution to external parties
Publications (e.g. newspaper subscription) purchased for UNDP’s own use
Inventory in transit is en-route goods purchased that are in the ownership of UNDP but in the possession of the carrier. The inventory in transit that is owned by UNDP (based on incoterms) must be recorded as inventories. Therefore, it is very important to determine the ownership of inventory items in transit based on respective incoterms.
For example, the term FOB stands for “free on board.” If goods are shipped FOB destination, the title of goods does not pass to UNDP until the carrier delivers the items; thus, UNDP should not recognize the inventory while in transit. If goods are shipped FOB shipping point, the title of such passes to UNDP when the carrier takes possession; therefore, UNDP shall recognize the inventory while in transit. If goods are shipped through FAS (free alongside) or CIF (cost, insurance, and freight), the party which bears the cost of loading and shipment is entitled to the legal title of the inventory while in transit.
Please refer to POPP on Management of Expenses for Receipt of Goods, Services, Works for detailed incoterms.

3.0 Flowchart

4.0 Procedures
In order to acquire inventory items, all COs are required to comply with UNDP procurement rules and obtain relevant approvals in line with Procurement Guidance established by Procurement Services Office (PSO). Once the relevant approvals are received, the transaction must be processed in Atlas through UNDP’s procurement catalogue.
Please refer to POPP Raising Requisitions for detailed policies and procedures on procurement.
4.1. Inventory In
Upon delivery of inventory items, UNDP staff is responsible for conducting an inventory in inspection. The receiving personnel shall compare the shipment to the packing slip and approved purchase orders (POs) to ensure that the correct items and quantity are being delivered. The receiving personnel shall reject any unauthorized deliveries or damaged items at the point of inventory in.
In COs where UNDP has to act as principal recipient of Global Fund, all medical supplies / equipment received must be inspected by UNDP pharmacists following guidelines established by WHO to ensure the quality of medical supplies / equipment.
UNDP staff shall record all receipts in an inventory in note (i.e. transaction record) which records the date, description, and quantity of items received with reference to the approved PO number. This note should be signed by the receiving personnel, and retained in the office files. A copy of this note should be sent to the CO’s Finance unit for later matching with the vendor’s invoice and PO during the payment process. The inventory in note must be documented as the evidence of receipt for the payment process. A copy should also be sent to the Buyer to compare it to the open POs, to keep track of un-delivered items.
Some COs may currently use Good Receive-In Note (GRN) for inventory in process, which has a similar format and serves the same function as inventory in note. For COs where GRN is not currently in use, the inventory in note must be used for inventory in process. 
All COs must assign a sequential document number to the inventory in note (or GRN). The sequential number should  start with operating unit ID and follow with sequential numbering. For example, In No.: JAM0005.
4.2.   Inventory Out
Upon request from local governments / implementing partners for distribution of inventory items  , an issuance form must be submitted to UNDP and approved by the Resident Representative or designated official. The issuance form should be documented as evidence for inventory out and can be used to monitor   programme progress. It is also used for later matching with the inventory out note to keep track of requested but undelivered items. Based on a duly approved issuance form, UNDP staff at warehouses, service centers, distribution points, etc. shall separate items ready to be shipped or distributed (to the end users) from the rest of the inventories. It will be the decision of COs to determine the type of distribution system and logistics to be applied.
At the point of distribution, UNDP staff shall prepare an inventory out note (i.e. consumption record) which records the date of distribution and the quantity of items distributed, with reference to issuance form. In addition, UNDP staff must obtain the acknowledgement / signature of the local recipient/ receiving personnel upon distribution / issuance, and keep a record of all signed inventory out notes.
In some cases, UNDP acts as the principal recipient and procures Global Fund medical supplies, which are directly shipped to the central warehouses of sub-recipients (e.g. local governments). In this scenario, the control of the medical supplies is passed over to the sub-recipient only upon completion of quality inspections and inventory in process by UNDP staff. Therefore, in this scenario,  UNDP staff are responsible for preparing both the inventory in note and the inventory out note..
Based on these inventory in notes and inventory out notes, UNDP inventory data analysts shall regularly update stock cards to track movement of inventories. By maintaining stock cards, the periodic physical verification process will be significantly facilitated, and the information should  help to determine the need for replenishments. All COs will be required to maintain inventory records for each warehouse, distribution point, service center, etc. to monitor the movement of inventories. These records will also be used for quarterly reconciliation between stock cards and physical count results. It will be each COs’ decision whether to use any computerized system (e.g. excel spreadsheet, software, etc.) or to keep the manual records. An example of the stock card is shown in Input (below)
All COs must assign a sequential document number to the issuance form and the inventory out note. The sequential number should be starting with operating unit ID followed by sequential numbering. For example, Issuance Request No.: JAM0026  and Out No.: JAM0001.
UNDP Financial Regulations and Rules (FRR), Rule 124.01 (c) states:
“Physical inventories shall be taken of supplies, equipment or other property owned by UNDP, or entrusted to the charge of UNDP, annually or at such intervals as deemed necessary to ensure adequate control over such property. The selection of items to be inventoried shall be the responsibility of the Assistant Administrator, Bureau of Management, who shall also arrange for the conduct of physical inventories at headquarters.”
All COs are required to perform inventory count exercise on a quarterly basis, i.e. on 31 March, 30 June, 30 September and 31 December, for each storage location. COs may decide to perform a physical count at more frequent intervals (e.g. on monthly basis, or when a major shipment is received). Resident Representatives or designated officials are requested to certify the quantity and value of the inventories (including the impact of expiry, damage, obsolescence, etc.) reported by their offices. All COs must compile and submit the required inventory control report for each project (i.e. COA specific), which records beginning and closing balances of the inventories at quarter end, and submit it through the Document Management System (DMS) together with the RR’s inventory certification to the HQ Accounts Division.
For COs that do not hold any inventory items in hand at the quarter end, the inventory control report with the RR’s inventory certification is still required,  verifying that the balance of inventories is zero.
The submission dates for the inventory control report and inventory certification are: 15th April, 15th July, 15th October, and 15th January for 1st, 2nd, 3rd and 4th quarters respectively.
RRs shall appoint a focal point to oversee physical count of these inventories. For the physical inventory count, the duties of the focal point include ensuring that:
a).   A complete inventory count takes place at least on a quarterly basis, with a plan including scheduled days and time. The year-end physical inventory count may require closing the storage facility during the count.
b).   Inventory items are counted according to the units by which they are issued (e.g. tablet or piece), not by the carton or box.
c).   Quantities in open containers for inventory items packaged in bulk are estimated (e.g. one liter bottle of syrup that is ½ full, estimate as 0.5 liters).
d).   Damaged or expired inventory items are separated from the rest.
e).   Physical count column in the inventory control report is filled out – make sure to write the date of physical inventory count , using a different color ink to record the quantity of the inventory items counted during the exercise.
f).    Results of the physical inventory count are reconciled with the balances on the stock cards; variances, if any, are investigated; and the approval of the RR is obtained to update the balances on stock cards. 
g).   The balance on the stock cards is updated by adding or subtracting the excess or missing quantities.
h).   If applicable, dispose of damaged or expired inventory items found during the physical inventory count  and record the corresponding information   on the stock cards. For such disposition, the COs must comply with the Financial Regulations and Rules, Rule 124.02:
“The Assistant Administrator, Bureau of Management, shall establish review committees for headquarters and other locations, to render written advice to him/her in respect of loss, damage or other discrepancy in relation to the property, plant and equipment of UNDP. The Assistant Administrator, Bureau of Management, may delegate responsibility under this Rule as may be appropriate in fulfilling the purposes of this Rule. He/she shall establish the composition and terms of reference of such boards, which shall include procedures on determining the cause of such loss, damage or other discrepancy, the disposal action, and the degree of responsibility, if any, attaching to any official of UNDP or other party, for such loss, damage or other discrepancy. The Assistant Administrator, Bureau of Management, shall be responsible for the disposal of property, plant and equipment by means other than sale and shall issue administrative instructions for such disposal actions.”
All COs shall review the variance between the stock cards and the physical inventory counts. The items with variances shall be recounted; variances shall be investigated and resolved by the physical count focal point. The RR should approve the outcome of the investigation.  Once the accuracy of counted items and units is approved by RR, the focal point shall then record these variances as quarterly inventory adjustment on stock cards and document a thorough explanation for the variance.
For COs where there is no  formal guidance on carrying out physical counts, please refer to the Guidelines on Physical Count of Inventories.
Inventory in Transit
To ensure the correct accounting and reporting of inventory in transit, all COs (local procurement) or out-posted HQunits (central procurement) must, on a timely basis, review the respective incoterms for each open purchase order and confirm whether, although the physical receipt of such items has not yet happened, the inventory items have become UNDP’s property based on the incoterms.
If goods are shipped through incoterms such as FOB shipping point, FAS, CIF, etc and are in transit at end of the quarter, they must be recognized through the regular Receipting Process. At every quarter end, COs/ out-posted HQ units are required to review and record the balance of inventory in transit items have become UNDP’s property based on the incoterms on the inventory control report.
Please refer to POPP Receipt of Goods, Services, Works for detailed policies and procedures on receipting for goods in transit.
After the quarterly physical count, a valuation of inventories shall be performed by the COs or out-posted HQ units at every quarter end and the results must be incorporated in the relevant column of the inventory control report. For locally procured inventory items, the valuation must be performed by COs. For centrally-procured inventory items, the valuation must be performed by the outposted HQ units.
Inventories shall be valued as follows:
a).   For inventory items that are held for sale,  use the lower of cost and net realizable value;
b).   For inventories held for distribution at no charge or for a nominal charge, use the lower of cost and current replacement cost.
The cost of inventories shall comprise the following:
a).   Costs of purchase, which comprise (i) the purchase price, (ii) import duties and other taxes (other than those subsequently recoverable by UNDP from the taxing authorities), (iii) transport, (iv) handling, and (v) other costs directly attributable to the acquisition of inventories.
b).   Other costs incurred in bringing the inventories to their present location and condition.
While calculating the cost of inventories, the costs shall be assigned by using the first in, first out (FIFO) method. The FIFO method assumes that the items of inventory that were purchased first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. As UNDP uses the periodic inventory method to account for inventories at end of the quarter, the latest invoice price (s) shall be used to value the balance of inventories.
For donated inventory items, fair value as at the date of donation should be used to determine cost. The fair value of a donated inventory item is normally based on what the item would cost if purchased (i.e. market purchase price). The quoted market prices or price bulletins in the active market will represent the best measure of fair value of donated inventory items.
Net realizable value or current replacement cost shall be determined in the following manner:
a)     For inventories held for sale (e.g. UNDP publications held for sale), use the current selling price as the net realizable value;
b)    For inventories held for distribution at nominal or no charge (e.g. Global Fund medical supplies), use the current purchase price as the net realizable value.
The RR shall report on a quarterly basis to HQ Accounts Division, through the DMS, the quantity and value of inventories and inventory in transit at each quarter-end by submitting certified inventory control reports ( see section on inputs  below ). The certification must be submitted by 15th April, 15th July, 15th October, and 15th January for the 1st, 2nd, 3rd and 4th quarters respectively.
Based on these reports, an accounting journal entry will be recorded by HQ Accounts at every quarter end, to account for the value of inventories as assets and to reduce the corresponding periodic expense by the same amount. The accounting journal entry will be automatically reversed out in the following month. The accounting entries will be posted using the chart of accounts assigned to the inventories.
The following accounting entry will be booked at every quarter end:
DR. Inventories
CR. Expense
DR. Inventory in transit
CR. Expense
HQ Accounts must complete the review of the reports and  record the accounting journal entry for the inventories by 20th April, 20th July, 20th October, and 20th January for the 1st, 2nd, 3rd and 4thquarters respectively.  
Reporting Impact
The accounting journal entry of inventories adjustment does NOT impact available resources in the project budget balance. However, the adjustment will affect the Donor Report and the Combined Delivery Report (CDR) effective 1 January 2012 as follows:
a)     The donor report will present the value of inventories as “future expenses” under the category of “un-depreciated assets and inventory”. The value of inventories reported represents the items to be distributed and expensed in the next reporting period.
b)    In the CDR, the value of inventories will be reported under the “fund utilization” section on the second page by UNDP. The value of inventories reported represents items to be distributed and expensed for programmes / projects in the next reporting period.
UNDP OFA will summarize the returns of inventory control reports and report the value of inventories as assets in the UNDP Financial Report. The inventories note disclosure will be as follows:

Note 10. Inventories

At December 31 (Thousands of United States dollars)
2011 (Restated)
Medical supplies
Electoral equipments and supplies
Crisis supplies and equipments
Other inventories
Total Inventories
Fuel includes fuel held for sale. Due to serious crisis or fuel shortage in country such as the Democratic Republic of Congo, Afghanistan, and Nepal, UNDP country offices operate UN gas stations which hold a material amount of fuel for distribution to UN agencies.
Medical supplies are comprised of medical supplies procured for Global Fund operations. As per the Global Fund agreement, UNDP is the principal recipient of last resort; however, due to the capacity issues of local governments, UNDP has to act as principal recipient in number of cases and has to keep the control on these supplies until they reach the end users.
Electoral equipments and supplies are procured to support the development of the democratic governance in developing countries. In general, such supplies are stored and intended for the planned elections which may cover multiple electoral calendars.
Crisis supplies / equipment are procured and stored for humanitarian emergency distribution when an earthquake, flood, or other crisis arises.  UNDP stores these supplies until the delivery reaches the end users.

5.0 Inputs

6.0 Deliverables
Quarterly Inventory Control Report
Quarterly Inventory Certification

7.0 Roles and Responsibilities
Authority to acquire inventories
The Assistant Administrator / Chief Procurement Officer (CPO) of the Bureau of Management (BoM) is responsible for all inventories acquired, controlled and managed by UNDP. The CPO may delegate his/her authority to acquire, control and manage inventories to each Resident Representative and Head of Out-Posted Headquarters’ Unit as may be appropriate in fulfilling the purposes of UNDP FRR.
Responsibility of Business Units (Out-posted HQ Units and COs)
1)     Acquire via E-requisition / PO / Receipt / AP voucher.
2)     Receive and inspect the inventories in compliance with PSO procurement guidelines.
3)     Safeguard and manage the distribution of the inventories to end users.
4)     Dispose of damaged or expired inventories according to the FRR.
5)     Compile and document inventory in notes and inventory out notes.
6)     Update stock cards based on daily movements.
7)     Reconcile and maintain inventory records.
8)     Perform physical inventory count on a periodic basis (at least quarterly).
9)     Investigate and record any adjustments (e.g. obsolescence, damage, theft, etc.) of inventories.
10)  Perform valuation of inventories at quarter end.
11)  Review and report the balance of inventory in transit on the quarterly inventory control reports.
12)  Ensure an inventory control report is prepared, reviewed, and certified for each project.
13)  Submit inventory control reports, which record inventory balance with both quantity and dollar value, at each quarter end to HQ Accounts Division via the DMS.
Responsibility of COs Resident Representatives
1)     Certify balance and value of inventories reported on the inventory control report(s).
2)     Ensure timely submission of inventory control report(s) with inventory certification(s) to HQ Accounts.
Responsibility of HQ Accounts Division
1)     Review the accuracy of inventory control reports (submitted by COs) and ensure that balances are certified by RR.
2)     Record an accounting journal entry to recognize the balance of inventories at quarter end.

8.0 Templates and Forms

9.0 Additional Info. and Tools

10.0 Lessons

11.0 On the Drawing Board