INVENTORIES

IAS 2 3/22/2009 1
 Prescribe accounting treatment for
inventories
 Identify cost to be recognised and carried
forward until related revenues are
recognised
 Conditions for write-down to net realisable
value
 Guidance on cost formulas

IAS 2 3/22/2009 2
 The standard excludes the following inventories:
 Work in progress under construction contracts
 Financial instruments
 Biological assets related to agricultural activity and
agricultural produce at the point of harvest
 Inventories held by producers of agricultural and
forest products and minerals measured at NRV are
excluded from measurement requirements of IAS 2
(e.g. where sale secured under forward contract)
 Inventories held by commodity broker-traders who
measure inventories at fair value less costs to sell are
excluded from measurement requirements of IAS 2 as
they are held to profit from fluctuations in price

IAS 2 3/22/2009 3
 Inventories: Assets
 Held for sale
 In the process of production for sale
 Materials and supplies to be consumed in production or rendering of
services
 For which the related revenue has not yet been recognised
 Net realisable value (NRV): estimated selling price in the ordinary
course of business less estimated costs of completion and costs
necessary to make the sale
 Net amount expected to be realised from sale in ordinary course of
business
 Affected by the entity’s own circumstances such as distance to deliver
the product to market
 Fair value (FV): amount for which the assets could be exchanged
or liability settled between knowledgeable, willing parties in an
arm’s length transaction
 Net amount expected to be realised in the market place
 Not an entity specific value (determined by forces of supply and
demand)

IAS 2 3/22/2009 4
 Measured at lower of cost and NRV
 Purchase costs
 Conversion costs
 Costs to bring inventories to present location and
condition
 Inventory costs of service providers such as labour:
 Measured at costs of production
 Costs of labour directly engaged in providing the service
 Attributable overheads and supervisory personnel
 Exclude sales and administrative labour, profit and non-
attributable overheads
 Costs of Agricultural produce per IAS 41
 Produce harvested from biological assets are measured
at fair value less estimated point-of-sale costs at the
point of harvest

IAS 2 3/22/2009 5
 Purchase cost are:
 costs directly attributable to acquisition of finished
goods, materials and services
 net of trade discounts, rebates and other similar items
 Purchase price

 Import duties

 Irrecoverable taxes

 Transport

 Handling

IAS 2 3/22/2009 6
 Costs directly related to units of production
 direct labour
 Systematic allocation of fixed and variable production overheads (FPO & VPO)to
convert materials into finished goods – indirect costs of production
 If more than one product cannot be separately identified, allocate on rational and
consistent basis e.g. sales value of finished goods
 Deduct NRV of immaterial by-products that are sold from cost of main product
 VPO vary with volume of production
 Indirect materials and labour
 Allocate to each unit of production on basis of actual use
 FPO remain constant regardless of volume of production e.g.
 Maintenance and depreciation of factory buildings & equipment
 Management and administration of factory
 For normal capacity expected on average over a number of periods allowing for
planned maintenance – actual production over a number of periods can be used as an
estimate
 Allocated to each unit of production
 In periods of low production the allocation per unit is not increased but recognised as
expense if unallocated
 Decrease allocation per unit in periods of high production so that inventory is not
measured above cost

IAS 2 3/22/2009 7
 E.G. designs for specific customers or non-
production overheads
 Certain borrowing costs can be included per IAS
23
 Deferred settlement costs are expensed as
interest over period of financing
 The following must be expensed and not
included in inventory:
 Abnormal and wasted materials, labour or production
costs
 Storage costs unless necessary for conversion process
 Administrative costs not related to bringing inventory
to a specific location and condition for sale
 Selling costs

IAS 2 3/22/2009 8
 Can be used to approximate cost for
convenience, but last-in first-out formula is
prohibited
 Standard costs are normal costs that are
regularly reviewed and revised to keep them
current
 Retail method used for large volume of
turnover of items with similar margins
 Reduce sales value by average percentage gross
margin taking into account marked down items

IAS 2 3/22/2009 9
 Attribute specific individual costs to separately
identifiable items of inventory:
 Items not ordinarily interchangeable
 Goods and services produced and segregated for
specific projects
 Use a first-in, first-out (FIFO) or weighted average cost
formula for large numbers of items that are ordinarily
interchangeable
 These methods could be used to obtain a predetermined
effect on profit or loss
 Use the same formulae for inventories with similar nature
or use even if in different geographical location or tax
regime
 FIFO assumes items bought first are sold first and uses most
recent prices
 Weighted average takes the average of cost at beginning of
period and during the period

IAS 2 3/22/2009 10
 Write down to NRV if below cost due to:
 Damage
 Declining selling prices
 Increased costs to complete or sell
 Write down by item, product line or service, not by class
of inventory
 Use most reliable estimates using prices directly after the
end of the reporting period to confirm circumstances at
the period end
 Use contracted price and if not available, general selling
prices
 Provisions for sale or purchase contracts are recognised
and measured per IAS37
 Only write down materials if NRV of finished product < cost
– replacement cost of materials
 Assess NRV at each period end and reverse write down if
NRV > cost (reversal limited to original write down)
IAS 2 3/22/2009 11
 Recognise inventories as expense in period
when related revenue is recognised
 Recognise loss or write-down in period it
occurs
 Reduce expense by any write downs
recognised in previous periods and those
reversed in the current period
 Inventories allocated to other assets (e.g.
property, plant or equipment) are expensed
over the useful life of the asset

IAS 2 3/22/2009 12
 The financial statements shall disclose:
 Accounting policies in measuring inventories and
formulas used
 Total carrying amount of inventories and by class
 Amount carried at fair value less costs to sell
 Amount recognised as expense during the period
 Amount of write-down recognised as expense in
the period
 Amount of any reversal of any write-down that is
recognised as reduction of expensed inventories
 Circumstances that led to reversal of write-down
 Carrying amount of inventories pledged as
security for liabilities
IAS 2 3/22/2009 13
 Inventories are assets held for sale for which related
revenues have not yet been recognised
 Measure at lower of cost and net realisable value
 recognise initially at cost and write down to NRV if
circumstances after period end confirm that NRV is lower than
cost and reverse write down when NRV rises above cost
 Include costs to bring inventories to location and condition
for sale including purchase or conversion costs
 Use purchase costs or formulas (FIFO or Weighted Average)
to determine amount to be recognised where large volume
of similar items are sold
 Expense carrying value of stock when sale is recognised
and reduce the expense for any write-downs
 Disclose accounting policies, classes of inventory and
accounting entries

IAS 2 3/22/2009 14