ACC 203

MODULE 4: PAS 2
AND PAS 41

Inventories Almira Diosa D.De

Biological Assets Castro,CPA
 PAS 2 INVENTORIES
Learning Objectives

1 To understand the meaning of inventories.

2 To identify the items included in inventory cost.

3 To identify the cost formulas required by IFRS.

4 To know the measurement of inventory in the

statement of financial position.

5 To apply the lower of cost and net realizable

value basis of measurement.
 DEFINITION & P R E S E N T A T I O N

Inventories include assets held for

sale in the ordinary course of
business, assets in the production
process for sale in the ordinary
course of business, and materials
and supplies that are consumed in
production.

One line item in the statement of financial position

PAS2, PARAgRAPh 6, Generally classified as current assets
Details and composition shown in the note disclosure
DeFiniTion

… it is broadly classified into two:

1. Inventory of Trading concern
2. Inventory of Manufacturing
 WHO OWNS THEINVENTORY?
“transfer of title or
delivery”
…that includes the following:
Goods owned and on hand
Goods out on consignment
Goods in the hands of sales agents
Goods held by customers on
approval or on trial
B U T F O R G O O D S I N TRANSIT ..
..it will depend on the terms given.
FOB destination - property of seller
and such is responsible for the
freight charges
FOB shipping point - property of
buyer and such is responsible for the
freight charges
Freight prepaid - freight charge is
paid by the seller
Freight collect - freight charge is
paid by the buyer
I M P O R TA N T T E R M S TO R E M E M B E R
Net Realizable 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 price that would be
received to sell an asset or paid to
transfer a liability in an orderly
transaction between market
participants at the measurement date.
 ATINITIALRECOGNITION: 1. COST

Excluded from the cost of inventories

and expensed as incurred
Abnormal amounts of wasted
materials, labor and other
production costs
Storage costs unless necessary in
the production process
Administrative overheads
Distribution or selling costs
Fixed production overhead - remains
constant regardless of volume of production
Variable production overhead - varies
directly with volume of production
 COST FORMULAS
FIRSTIN, FIRSTOUT ( FIFO)
“ the goods first p u r c h a s e d a r e first s o l d ”
Favors the statement of financial
position since the inventory is stated at
current replacement cost
Objection is there is improper
matching of cost against revenue
because goods sold are stated at
older prices = understated cost of
sales
INFLATION = highest net income
DEFLATION = lowest net income
Periodic and perpetual system both
yield the same inventory costs.
LASTIN, FIRSTOUT ( LIFO)
“ the goods last purchased are first sold”
- the standard does not permit the use of
LIFO anymore as alternative formula in
measuring inventory cost.
WEIGHTED AVERAGE
Easy to apply, produces inventory
valuation that approximates the
current value
May have considerable lag between
current cost and inventory valuation
Under the moving average method
for a perpetual system, a
new weighted average unit
cost must be computed after every
purchase and purchase return
Periodic and perpetual system does
NOT yield the same inventory costs.
SPECIFIC IDENTIFICATION
- means that specific costs are attributed
to identified items of inventory. This
method is appropriate for inventories that
are aggregated for a specific project
and inventories are not interchangeable.
 2 . N E T REALIZABLE V A L U E
The estimated selling price in the ordinary course of business less the estimated cost of completion and the
estimated cost of disposal - as a general rule, assets should not be carried at amounts greater than those
expected to be realized from their sale or use.
Situations in which NRV is likely to be less than cost,i.e.when there has been:
an increase in cost or fall in selling price
a physical deterioration in the condition of inventory
obsolescence of products
a decision as part of the company‘s marketing strategy to manufacture and sell products at a loss
errors in production or purchasing
Inventories are usually written down to net realizable value on an item by item or individual basis.
A C C O U N T I N G FOR INVENTORY WRITE-DOWN
The cost is lower than net realizable value.
The net realizable value is lower than cost.
The following treatment is required when inventories are sold:
1. The carrying amount is recognized as an expense in the period in which the related revenue is
recognized.
2. The amount of any write-down of inventories to NRV and all losses of inventories are recognized as an
expense in the period the write-down or loss occurs.
3. The amount of any reversal of any write-down of inventories arising from an increase in NRV, is
recognized as a reduction in the number of inventories recognized as an expense in the period in
which the reversal occurs.
 P A S 41 A G R I C U L T U R E
Learning Objectives

1 To understand the meaning of biological asset,

agricultural produce and agricultural activity.

2 To know the recognition and measurement of

biological asset and agricultural produce.

3 To understand the recognition of bearer plants

as property,plant and equipment.

4 To understand the recognition of bearer

animals.
 IAS 41applies the requirements of IFRS to the treatment of Biological Assets. It was
issued on February 2001, it seeks to harmonize practice in accounting for agriculture,
which demonstrates fundamental differences in its nature and characteristics to other
business activities.
Agricultural activity is the management by an entity of the biological
transformation of biological assets for sale, into agricultural products or into
additional biological assets.
Agricultural produce is the harvested product of an entity‘s biological assets
Biological assets are living animals or plants.
Biological transformation compromises the processes of growth,
degeneration, production and procreation that cause qualitative changes in
a biological asset.
A group of biological assets is an aggregation of similar living animals or plants.
Harvest is the detachment produce from a biological asset or the cessation
of a biological asset‘s life processes.
 B I O L O G I C A L ASSETS
Agricultural produce at the point of harvest
Government grants
The standard does not apply to agricultural
land or intangible assets related to agricultural
activity.
After harvest, IAS 2 is applied. The core
income-producing assets of agricultural
activities, held for their transformative
capabilities that leads to various outcomes:
Asset changes:
Growth: Increase in quantity and or quality
Degeneration: Decrease in quantity and or
quality RECOGNITION CRITERIA
Creation of new assets: 1. The entity controls the assets as a result of IAS events.
Production: producing separable non-living 2. It is probable that the future economic benefits
product associated with the asset will flow to the entity.
Procreation: producing separable living 3. The fair value or cost of the asset to the entity can be
animals. measured reliably.
 TWO BROAD CATEGORIES OF
AGRICULTURAL PRODUCTION SYSTEM:
Consumable: animals/plants themselves
are harvested
Bearer: animals/plants bear produce
for harvest
Biological assets are usually managed in
groups of animals or plant classes, with
characteristics which allow sustainability in
perpetuity.
Land often forms an integral part of the
activity itself in pastoral and other land-
based agricultural activities.
B E A R E R B I O L O G I C A L ASSETS
Amendment to IAS 41regarding plant-based
bearer biological assets including trees
grown in plantations, such as grape vines,
rubber trees, and oil palms are used solely
to grow produce crops over several periods
and are not in themselves consumed.
Biological Assets. These assets have been
removed from the scope of IAS 41and should
be accounted for under IAS 16 Property,
Plant and Equipment. They are measured at
accumulated costs until maturity and are
then subject to depreciation and
impairment charges. Agricultural produce
from these plants continues to be
recognized under IAS 41/IAS 2.
RECOGNITION
In statement of financial position, the
biological asset must be shown at fair value
less estimated point of sale costs,
incorporating the consequences of all
biological transformation.
P R E S E N TAT I O N A N D D I S C L O S U R E
In the statement of financial position,
biological asset should be classified as a
separate class of assets falling under
neither current nor non-current
classifications. This reflects the view of such
assets as having an unlimited life on a
collective basis; it is the total exposure of
the entity to this type of asset that is
important.
Biological asset should also be sub-
classified either in statement of financial
position or as a note to the accounts:
a.Class of animal or plant
b.Nature of activities (consumable or
bearer)
c. Maturity or immaturity for intended use
PRESENTATION IN SFP
Agricultural produce should be classified as inventory in the statement of financial position
and disclosed separately either in the statement of financial position or in the notes.
A G R I C U LT U R A L P R O D U C E
It is recognized at the point of harvest. Agricultural
produce is either incapable of biological process or such
processes remain dormant. Recognition ends once the
produce enters trading activities or production processes
within integrated agribusinesses, although processing
activities that are incidental to agricultural activities and
that do not materially alter the form produce are not
counted as processing.
MEASUREMENTAND PRESENTATION
The IAS states that agricultural produce should be
measured at each year end at fair value less estimated
point of sale cost, to the extent that is sourced from an
entity‘s biological assets. This is logical that when you
consider that, until harvest, the agricultural produce was
valued at fair value anyway as part of the biological asset.
The change in carrying amount of the agricultural produce
held at year end should be recognized as income or
expense in profit or loss. This will be rare as such produce
is usually sold or processed within a short time.
THANKS!
Any questions?