Kentau Metallurgy JSC - Inventory NRV, Loan Classification and Subsequent Events

Measurement rule (IAS 2.9, 2.28–33). Inventories are measured at the lower of cost and net realisable value. NRV is the estimated selling price less the estimated costs of completion and the costs necessary to make the sale. Where a firm sales contract exists, the contract price is used for the contracted quantities; the general (spot) price is used only for the remainder.

Correct NRV

• Contracted 2,000 t × KZT 165,000 = KZT 330,000,000
• Uncontracted 3,000 t × KZT 150,000 = KZT 450,000,000
• Gross selling price = KZT 780,000,000
• Less costs of completion = KZT (300,000,000)
• Less selling costs (5% × 780,000,000) = KZT (39,000,000)
• NRV = KZT 441,000,000

Write-down required = 900,000,000 − 441,000,000 = KZT 459,000,000.

Misstatement = 459,000,000 − 187,500,000 already booked = KZT 271,500,000, which exceeds overall materiality of KZT 250,000,000.

Management made two errors: it ignored the firm contract price for 2,000 tonnes (understating the selling price) and omitted the KZT 300,000,000 completion costs (overstating NRV). The net effect understates the write-down by KZT 271,500,000. The auditor should request an adjustment; if management refuses, the misstatement is material and the opinion should be qualified on grounds of material misstatement. The 18% price fall is also an impairment indicator for the processing plant under IAS 36 and should be tested.

Classification (IAS 1.74–76). The covenant was breached at the reporting date, so the loan was payable on demand at 31 December 2025 and must be classified as current. A waiver agreed after the reporting date does not change the condition existing at year end; IAS 1.76 permits non-current classification only where the lender agreed a period of grace ending at least twelve months after the reporting period by the end of that period. Reclassifying KZT 3,000,000,000 to current liabilities turns the working capital position negative.

Subsequent event (IAS 10.9–10). The 15 February waiver is a non-adjusting event: it does not affect the condition at the reporting date. It is nonetheless material and should be disclosed, together with the terms of the waiver.

Going concern (ISA 570). Indicators are cumulative: the covenant breach and reclassification, an uncommitted refinancing, a forecast shortfall of KZT 600,000,000 by June 2026, and the uninsured fire after year end. A material uncertainty exists unless the refinancing becomes committed before the report is signed.

Reporting outcome

• If the going concern basis is appropriate and disclosure is adequate: unmodified opinion with a separate "Material Uncertainty Related to Going Concern" section (ISA 570.22–23); an Emphasis of Matter paragraph is not an acceptable substitute.
• If disclosure is inadequate: qualified or adverse opinion.
• If the going concern basis is not appropriate: adverse opinion.

Obtain written representations, inspect the waiver and any refinancing term sheet, review post-year-end cash flows to the date of the report, and communicate with those charged with governance.

Classification (IAS 10.10–11). The fire is a non-adjusting event. The packing plant existed and was under the entity's control at 31 December 2025; the destruction arose from conditions created after the reporting date. Accordingly, no adjustment is made to the carrying amount of KZT 800,000,000, and no additional depreciation is charged for 2025.

Disclosure (IAS 10.21). The event is of such size that non-disclosure would influence users: KZT 800,000,000 is more than three times materiality of KZT 250,000,000, and the asset was uninsured. The notes should disclose the nature of the event and an estimate of its financial effect (carrying value destroyed, absence of insurance recovery).

Going concern interaction. The loss is not merely a disclosure matter. Removing an uninsured operating asset may reduce future cash flows and, combined with the uncommitted refinancing and the KZT 600,000,000 forecast shortfall, may reinforce the material uncertainty. Obtain management's revised cash-flow forecast reflecting the fire, test the assumptions, and consider whether the going concern disclosure still describes the situation accurately.

Audit response and reporting

• Read board minutes and post-year-end correspondence on the fire; inspect insurance policies to confirm the absence of cover.
• Consider whether the lack of insurance indicates a deficiency in risk management to report to those charged with governance.
• If the disclosure is omitted or is misleading, consider a qualified opinion on grounds of material misstatement; the fire itself does not require a qualification if it is properly disclosed.