Ind AS 2

Ind AS 2 – Inventories
Introductions
♦ applies to all inventories, except:
− Construction contracts (Ind AS 115)
− Financial instruments (Ind AS 109)
− Biological assets related to agricultural activity and agricultural produce at the
point of harvest (Ind AS 41)
− … and measurement of inventories held by:
− Producers of agricultural and forest products, agricultural produce after harvest,
and minerals and mineral products
− Commodity broker-traders

Definition
Inventories are assets
1. Held for sale in ordinary course of business
2. In the process of production for such sale OR
3. In form of material or supplies to be consumed in production process or rendering of services.

Inventories includes the following:

1) Raw materials & Components
2) Stores & Spares (including machine spares)
3) Work in progress
4) Finished stock
5) Loose Tools
6) Intangible items of inventory, such as software held for sale.
Inventory should be physically verified and valued at the end of the accounting period i.e. it is an
arrived figure (arrived by physical verification) & not derived figure (ledger a/c calculation)

Valuation
Inventories should be valued at lower of cost or net realizable value.
Major points for valuation of inventories are:
 Ind AS 2

1. Determination of cost of inventories.

2. Determination of net realizable value of inventories.
3. Comparison between the cost and net realizable value.

If there is well established industry practice, value the same at NRV, then Ind AS 2 is not applicable.
Else apply Ind AS

Cost of Inventories
Cost of purchase + Cost of conversion + other cost for bringing inventory to the present location
& condition. Cost of purchase excludes those duties and taxes that are subsequently recoverable
by the enterprise from the taxing authorities. Also excluded are trade discounts, rebates and duty
drawbacks. Cost of conversion = Direct Labour + Production overheads (both fixed and variable)
and Other costs. Here cost means WC in cost sheet.

AS 2 deals with valuation of inventory & not verification.

Cost = works Cost NRV = SP in mrkt – estimated c

(cost sheet)
Cost of purchase + cost of conversion (DL + Fact o/h) + other cost, incidental to bring the product to present
OR
(WIL)

NRV is on B/S date. When there are 2 different markets local & international, then closing stock
has to be divided on proportionate basis &NRV to be applied respectively.

Can closing stock of inventory appear in TB?

Yes, whatever journal entry passed appears.

Is profit considered in valuing Inventory if NRV is lesser & the same is considered for valuation?
No, because, it is lesser of cost &NRV. Though NRV considers SP which includes profit, which
will be considered as cost, if & only if, it if lesser then cost.
Normally, RM/Stores & Consumables/Machine spares are valued at cost &Finished goods/WIP
is valued at Cost or NRV (W/L).
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Ex:
FG Cost (a) NRV (b) c = a/b(w/l)
A 100 80 80
B 500 510 500
C 910 905 900
D 300 295 295
Total 1800 1790 1775
Total not considered, apply individually.
Where possible, value individually, else, in totality.

Ex: Cost of WIP incurred hitherto 80/-

Further cost of completion 20/-
SP of FG 102/- Selling expense 4/-
The closing inventory will be valued at

Cost NRV
OR
(WIL)
80 102 – 20 – 4 = 78

Therefore, the value of closing inventory is 78/-.

GST/Duty on Purchase

In Accounts In Income Tax u/s.145A, suggests Inclusive method

Don’t consider adjustable duty in cost (All duties paid should be included in cost)

Note: Inclusive/Exclusive methods are revenue neutral.

Example - Mr. X manufacturer - purchases Rs. 100L, other non GSTable expense Rs. 40L,
Sales 80%, GST rate 18% on input as well as output.
Inventory Valuation:
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As per Ind AS 2 As per section 145A of Income Tax Act

(100L+40L)*20%= 28L (100L+18L+40L)*20% = 31.6L
EXCLUSIVE METHOD INCLUSIVE METHOD

7.1.
Irresp
ec

Exclusions from Cost of Inventories

Following costs are excluded from the cost of Inventories
1. Abnormal amounts of wasted materials, labour, other production cost
2. Storage cost
3. Administrative overhead
4. Selling and distribution cost
5. Interest and borrowing cost unless allowed under Ind AS 23.

Cost Formulae
1. Specific identification method/ Actual cost method is used where the inventory is not
ordinarily interchangeable. Each unit of inventory is specifically identified and each unit cost
is linked to a particular invoice. Method suited for jewelry, custom made goods etc.

2. Where specific identification method is not applicable, the cost of inventories is valued by
the following methods:
1. FIFO (First In First Out)
2. Weighted Average Cost.
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Cost Formulae (A/Cing Policy)

Othe
For products ordinarily not interchangeable (unique) Ex: Govinda’s shirt follow Specific Identification Metho

FIFO

Techniques of Measurement
The following methods of cost calculation are used when it is impractical to calculate cost.
1. Standard Cost – It is calculated considering normal utilization of resources and capacity and
efficiency.
2. Retail Inventory Method – This method is associated with periodic inventory systems where
detailed records are not kept. Retail stores that have numerous items with low unit costs
usually adopt this system. This method involves finding value of year-end inventory at retail
prices and applying a gross margin percentage so as to measure its cost.

Cost Technique (A/Cing Procedure)

Standard cost Retail Inventory Method

Net Realizable Value

Net realizable value means the estimated selling price in ordinary course of business, less the
estimated cost of completion (mainly for valuing WIP) and estimated costs necessary to make
the sale.
Inventories are usually written down to net realisable value on an item by-item basis. In some
circumstances, however, it may be appropriate to group similar or related items. This may be the
case with items of inventory relating to the same product line that have similar purposes or end
uses and are produced and marketed in the same geographical area and cannot be practicably
evaluated separately from other items in that product line.
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Circumstances under which valuation under NRV may be required

1. Where cost of inventories are not recoverable eg. Damaged or obsolete items
2. Where there is fall in the market prices

Considerations governing estimation of NRV are

1. Most reliable evidence available at the time the estimates are made as to amounts that the
inventories are expected to realize.
2. Fluctuations of price or cost directly relating to events occurring after Balance Sheet etc.

NRV of Raw Material

Materials and other supplies held for use in the 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 there has been a decline in the price of materials and it is
estimated that the cost of the finished products will exceed its net realisable value, the materials
are written down to net realisable value of such raw material.
In other words,
1. When the NRV of raw materials is lesser than its cost AND
2. Finished Goods are valued at NRV, being lesser than cost, only then the Raw materials are
valued at NRV.
e.g.,
RM Cost of RM NRV of Cost of FG NRV of Valuation Valuation of
RM FG of FG RM
A 100 105 140 135 135 100
B 100 80 140 150 140 100
C 100 80 140 135 135 80
In such circumstances, the replacement cost of the materials may be the best available
measure of their net realisable value.

Disclosures
The financial statements should disclose the following:
1. Accounting policy adopted in measuring inventories.
2. Cost formula used.
3. Classification of inventories-like finished goods, Raw material, spare parts and
its carrying amount.