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FAR

IAS 2: INVENTORIES

BASIC CONCEPTS

Definition
Inventories are assets:

1. That are held for sale in the OCB (Ordinary course of business)
NCA Held for sale is under PFRS 5 (Non-Current Asset held
for Sale)
2. That are in the process of production for such sale

It's a work-in-progress

It's like the number one, its just that the number 2 are not yet
complete

3. in the form of materials or supplies consumed in the production

process
4. that are NON-FINANCIAL assets

Classes of Inventories

1. Merchandising

Merchandise Inventory (Definition 1)

2. Manufacturing
1. Finished Goods
2. Work-in-process

3. Raw materials and Factory supplies

3. Service Business

Work In Progress
Example: Construction Service

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NOTE:

Work in PROCESS vs Work in PROGRESS

Process is under manufacturing; Progress is under
service

This is under AFAR

Construction in progress

SCOPE
General Rule → All inventories are under PAS 2
Exceptions:

1. With regards to recognition

1. Financial Instruments (PFRS 9: Financial Instruments)
This is a Financial Asset; PAS 2 does not deal with
Financial Assets
2. Biological Assets (PAS 41)
3. Agricultural Produce (PAS 41)

at the POINT OF HARVEST

if AFTER point of harvest, PAS 2 will take over
[Writer's notes: mah bodeeehhhhh~]
2. With regards to measurement

These animals have their own measurement rule that is not

the ones prescribed by PAS 2
1. Inventories Producers of Agricultural, Forest, and Mineral
Products
They follow NRV
2. Inventories of commodity brokers and traders

These are measure at Fair value less cost to sell (FV-CTS)

RECOGNITION
General Rule → If entity has legal title over goods, it is recognized as
inventories

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When is Legal title achieved?

Generally, possession = legal title

Exceptions:
1. Goods in Transit (Who is the owner will be the one who
will shoulder the cost)
Points of Transfer

FOB Shipping Point

Point of Transfer: When the inventory is loaded
and the transportation started to move towards
to destination.
POT: Third closest
FOB Destination

Point of Transfer: When the inventory is

delivered and arrived at the intended destination
POT: Last
Free Along-side (FAS)
Point of Transfer: When the inventory is
alongside the port

POT: Closest
Cost, Insurance, and Freight (CIF)
Point of Transfer: When the inventory is loaded
to the transportation
POT: Second closest

Ex-ship
Point of transfer: when the inventory is unloaded
from the transportation
POT: Fifth Closest
Payment of freight
Freight Collect

Buyer paid the freight

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Only pay for it when the item reaches the buyer

Example: COD
Freight Prepaid
Seller paid for the freight
2. Consigned Goods
Owner: Seller (Consignor)
Synonymous is Agency or Sales on Agency

The AGENT is the CONSIGNEE

Included in cost of inventory
Freight Out cost
This is the ONLY time you record freight-out; for
Cost of Inv. for consigned goods.
Everything else will be accounted under
selling expenses
Not Included in cost
1. Freight Cost of Returned Goods
This is the actual cost of freight when the goods
are returned
2. Original Freight Cost of returned goods
This costs refer to the costs that you incurred
when you first delivered the goods to the
consignee and then was returned to you for
some reason.
So example you gave 100 units for
consignment with freight of P10 per unit, and
then there are 20 units returned to you.
The 200 will form part of the "Original
Freight Cost of returned goods"
3. Commission and other Charges

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Example when the consignee will charge you for

selling
4. Freight-out to customer from consignee
Held on vs Out on
Goods HELD on consignment → Excluded from
inventory (you are the consignee)

Goods held by sales agent.

Goods OUT on consignment → Included (you are
the consignor)
3. Inventory Financing Arrangements
1. Sale with a repurchase agreement
Owner: Seller

Form: Sale; Substance: Borrowing

Seller still owns inventory
2. Pledge of inventories
Owner: Seller
Form: Sale; Substance: Borrowing
Pledgor/Borrower of money is the owner
3. Loan of inventories
Owner: Buyer
4. Sale with refund offer
Buyer is the owner

5. Sale on Trial/Approval
Owner: Seller
Seller is the owner but it is in the hands of the buyer
Test drive I guess?
Fitting room
Trial, so testing testing before buying buying
6. Installment Sale

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Owner: Buyer
Transfer of Ownership: Upon downpayment
Installment Sale will transfer ownership even before
payment of full purchase price
7. Lay-away sale
Owner is the seller
Lay-away sale will transfer the ownership upon
payment for full purchase price
8. Bill and hold sale
Owner is the buyer
Happens when you bought the inventory completely
but decided to have the seller hold and store it for the
meantime
Like when you got full inventory, you just leave the
item in the stash beside the shopkeeper (DOTA 2
reference)

9. Special Order sale

Owner: Buyer (upon completion)
Even if it has not been shipped yet
Sure sale is the other name
This sales ain't normal
When you sell shoes of a small size and then here
comes a giant, you will only make those custom
bespoke shoes if the buyer is a sure buyer
Another example: AtFest shirt
Guide Questions for Recognition
1. What is the perspective of the problem?

2. Is the inventory included or not?

3. What is the appropriate adjustment?
MEASUREMENT

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INITIAL

COST
Elements of Cost/Inventoriable Cost
1. Cost of purchase
1. Purchase price
You can buy it in either
1. Regular Purchase - Invoice Price (Net of trade
discount but before deducting cash discount)
If the problem is silent, assume Gross method
will be used for discount
2. Deferred Settlement
You will pay the payable BEYOND the credit term
2. Cost of conversion
3. Other cost necessary
SUBSEQUENT
LCNRV
Lower of Cost and Net Realizable Value
ACCOUNTING FOR INVENTORIES
PERIODIC SYSTEM
PERPETUAL SYSTEM
OTHERS
PURCHASE COMMITMENTS
INVENTORY ESTIMATION

AIS
Revenue Cycle

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