Transcript International Accounting Standard 2

International Accounting Standard 2
INVENTORIES
IAS 2
History
Originally IAS 2; Valuation and presentation of Inventories in the context of the
Historical cost system issued in October 1975.
Replaced by IAS 2; Inventories issued by IASC in December 1993.
SIC-1;Consistency-Different Cost Formulas for Inventories was issued by
Standing Interpretations Committee in December 1997.
Limited amendments to IAS 2 were made in 1999 & 2000.
In April 2001, IASB resolved to apply ALL Standards & Interpretations issued
under previous constitutions unless they were amended or withdrawn.
SIC-1 was replaced and IAS 2 was revised by IASB in December 2003.
Subsequently IAS 2 was amended by IFRS 8 Operating Segments; which was
issued in November 2006.
IAS 2
Applicability
Should be applied for annual periods beginning on or after January 1, 2005 to
ALL inventories except those which have been specifically excluded from its
scope.
IAS 2
Objective
To prescribe accounting treatment for inventories.
To provide guidance on determination of cost and its subsequent
recognition as an expense, including any write down to NRV.
To provide guidance on cost formulas used to assign cost to inventories.
IAS 2
Scope
This standard applies to ALL inventories, except:
Types of Inventories which are
outside the scope of IAS 2
Work in progress arising under
construction contracts [IAS 11]
Financial Instruments [IAS 32 and
IAS 39]
Biological Assets related to
agricultural activity and agricultural
produce at the point of harvest
[IAS 41]
IAS 2
Types of Inventories which are exempted
ONLY from measurement requirements of
standard but are within the scope of other
requirements in the standard.
Inventories held by Producers of agricultural
and forest products, agricultural produce
after harvest and minerals and mineral
products, to the extent that they are
measured at net realisable value.
Commodity broker-traders who measure
their Inventories at fair value less costs to
sell.
Definitions
Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production
process or in the rendering of services.
Net realisable value is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs
necessary to make the sale.
Fair value is the amount for which an asset could be exchanged, or a liability
settled, between knowledgeable, willing parties in an arm’s length transaction.
IAS 2
Measurement of Inventories
Cost
Net Realisable
Value
whichever is lower
Due to amendment in IAS 21; Effects of changes in foreign exchange rates,
exchange differences arising from the acquisition of inventories invoiced in
a foreign currency are not to be included in Cost Of Purchase.
Inventory purchased on deferred settlement terms
Difference between Normal purchase price and amount paid to be
recognised as Interest Expense.
IAS 2
Cost of Inventories
Costs of Purchase
Cost of Conversion
Other Costs
Purchase price
+ Import duties
+ Other taxes (other than
those subsequently
recoverable by the entity
from the taxing
authorities)
+ Transportation costs
+ Handling costs
+ Other costs directly
attributable to the
acquisition of finished
goods, materials and
services.
(-) Trade discounts
(-) Rebates and other similar
items
Costs of conversion includes:
•Other costs are included to
the extent they are incurred in
bringing the inventories to
their present location and
condition.
1.
Costs directly related to
production (such as direct
labour)
2.
Allocated variable production
Overheads
3.
Allocated fixed production
Overheads (based on the
normal capacity*)
[Un-allocated overheads are
recognised as expense]
4.
In case of Joint Products; costs
are allocated between the
products on a rational &
consistent basis.
For example: Costs of
designing products for specific
customers can be included in
the cost of inventories.
•IAS 23; Borrowing Costs
identifies limited
circumstances where
borrowing costs are included
in the costs of inventories.
*Normal Capacity is the production expected under normal circumstances, after adjusting loss of capacity.
IAS 2
COSTS OF INVENTORIES OF A
SERVICE PROVIDER
COSTS OF AGRICULTURAL PRODUCE HARVESTED
FROM BIOLOGICAL ASSETS
To the extent that service providers
have inventories, they are measured at:
Measured at:
Fair Value
Cost of production
+ Labour and other Personnel costs
+ Attributable overheads
Х Labour & other costs relating to sales
and general administrative personnel.
Х Profit Margins.
Х Non-attributable overheads.
IAS 2
(-) Estimated point of sale costs at the time of harvest.
Techniques for the measurement
of cost
Methods mentioned below can be used as per the convenience if the
results approximate cost
Standard Cost Method
Retail Method
Standard costs take into account
normal levels of materials and
supplies, labour, efficiency and
capacity utilisation.
The retail method is often used in the retail
industry for measuring inventories of large
numbers of rapidly changing items with
similar margins for which it is impracticable
to use other costing methods.
They are regularly reviewed
and, if necessary, revised in the
light of current conditions.
IAS 2
The cost of the inventory is determined by
reducing the sales value of the inventory by
the appropriate percentage gross margin.
An entity shall use the same cost formula for all inventories having a similar
nature and use to the entity. For inventories with a different nature or use,
different cost formulas may be justified.
IAS 2
Net Realisable Value
Where cost of inventories is not recoverable due to damage, obsolescence,
decline in selling price, or if estimated costs of completion or estimated
costs to be incurred to make sale have increased.
Materials and other supplies held for use in production of inventories are
not written down below cost if the finished products in which they will be
incorporated are expected to be sold at or above cost.
However, when a decline in price of materials indicates that cost of finished
products exceeds NRV, the materials are written down to NRV. In such
circumstances, the replacement cost of the materials may be the best
available measure of their NRV.
IAS 2
Net Realisable Value
Write-down of Inventories
•Inventories are usually written down to NRV item by item.
•Similar items which are produced & marketed in same geographical area and which
can’t be separately evaluated from other items in the product line can be grouped.
However it’s not appropriate to write-down inventories on the basis of classification.
•In case of Service providers, each service is treated as separate item and costs in
respect of each such service is accumulated.
Estimates for NRV
•Should be based on most reliable evidence.
•These estimates take into consideration:
Fluctuations of price/cost occurring after the end of period.
Purpose for which Inventory is held.
Assessment for NRV
•Done in each subsequent period.
•If earlier circumstances are not there, the amount of write-down is reversed; but
limited to the original write-down.
IAS 2
Net Realisable Value
Vs
Fair Value
Net Realisable Value
Fair Value
Estimated selling price (in the ordinary
course of business)
(-) Estimated costs of completion
(-) Estimated costs necessary to make the
sale
Amount for which an asset could be
exchanged, or a liability settled,
between knowledgeable, willing
parties in an arm’s length
transaction.
Amount that an entity expects to realise
from the sale of inventory in the ordinary
course of business.
This is not entity specific.
This method of valuation of inventories is
open to all types of inventories referred in
this standard.
This method is specifically
mentioned for Commodity brokertraders.
* “NRV” may not be equal to “Fair value(-) costs to sell”
IAS 2
Recognition as an expense

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When Inventories are sold
Carrying Amount of
inventories is
recognised as an Expense
When Inventories are written
down to NRV
Amount of Write-down and
all losses of inventories
should be recognised as an
Expense.
In case of increase of NRV
Amount of Reversal (if any)
shall be recognised as a
reduction in the amount of
inventories recognised as
an expense earlier.
In case Inventories are
allocated to other asset
accounts (such Plant & Equipment)
Such Inventories should be
recognised as an expense
during the useful life of that
asset.
*Amount of Inventories recognised as expense during the
period are often referred to as Cost Of Sales.
IAS 2
Classifications
Common classifications
Merchandise
Materials
Production
Supplies
Finished Goods
Work in
Progress
The inventories of a service provider may be described as work in progress.
IAS 2
Disclosure
The financial statements shall disclose:
(a) Accounting policies, including cost formula used;
(b) Total carrying amount of inventories and classifications;
(c) Carrying amount of inventories carried at fair value less costs to sell;
(d) Amount of inventories recognised as an expense;
(e) Amount of any write-down of inventories recognised as an expense;
(f) Amount of any reversal of any write-down that is recognised as a reduction
in the amount of inventories recognised as expense;
(g) Circumstances that led to the reversal of a write-down of inventories; and
(h) Carrying amount of inventories pledged as security for liabilities.
IAS 2
Significant Differences between
AS-2 and IAS-2
AS 2
•WIP of service providers is
specifically excluded.
•The Standard does not contain any
exclusion or separate provisions
relating to inventories held by
commodity broker-traders.
The measurement basis laid down in
the Standard, viz., lower of COST
and NRV, applies to inventories of
commodity trader-brokers.
IAS 2
•WIP of service providers is covered.
•The measurement requirements of the
Standard do not apply to the
measurement of inventories held by
commodity broker-traders who measure
their inventories at FAIR VALUE less
COSTS TO SELL.
Significant Differences between
AS-2 and IAS-2
AS 2
IAS 2
•The cost of inventories of items (other
than those which are not ordinarily
interchangeable and goods or services
produced and segregated for specific
projects) should be assigned by using
the FIFO or weighted average cost
formula (It is specifically required that
the formula used should reflect the
fairest possible approximation to the
cost).
Thus, the Standard does not give a
free choice between FIFO and
weighted average cost formula.
•The cost of inventories of items (other
than those which are not ordinarily
interchangeable and goods or services
produced and segregated for specific
projects) should be assigned by using
the FIFO or weighted average cost
formula. Unlike AS 2, IAS 2 does not
require that the formula used should
reflect the fairest possible
approximation to the cost.
Thus, the Standard gives a somewhat
free choice between FIFO and
weighted average cost formula.
Significant Differences between
AS-2 and IAS-2
AS 2
IAS 2
•There is no explicit requirement for use
of same cost formula.
•Same cost formula should be used for
all inventories having a similar nature and
use to the entity.
•The Standard specifically lists “selling
and distribution costs” among the
costs for which it is appropriate that they
be recognised as expenses in the
period in which they are incurred.
•The Standard specifically lists “selling
costs” (but not distribution costs)
among the costs for which it is appropriate
that they be recognised as expenses in
the period in which they are incurred.
•AS 2 does not deal with the issues
relating to recognition of inventories as
an expense.
•Issues relating to recognition of expense.
Refer slide number 13
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