INVENTORIES TOPIC OUTCOME:
At the end of this topic, students should be able
MFRS 102
Objectives of the Standard
• prescribe the accounting treatment for
[MFRS 102] are to:
inventories;
• provide guidance for determining the cost of
inventories;
• recognise an expense, including any write-
down to net realisable value.
• provide guidance on the cost formulas that are
used to assign costs to inventories.
to:
• Explain and calculate the cost of inventories
• Explain the measurement of inventories in
accordance with MFRS 102
• Explain and calculate the writing down of
inventories to net realizable value
• State the disclosure and presentation of
inventories in accordance with MFRS 102
SCOPE
MFRS 102 applies to all inventories, except:
a) Work in progress arising under construction contracts, including
directly related service contracts,
b) Financial instruments (MFRS 132 and MFRS 139),
c) Biological assets related to agricultural activity and agricultural
produce at the point of harvest (MFRS141).
MFRS 102 measurement principles do not apply to the inventories
held by:
a) Producers of agricultural and forest products, agricultural produce
after harvest, minerals and mineral products, to the extent that they
are measured at net realizable value in accordance with well
established practices in those industries.
b) Commodity broker-traders who measure their inventories at fair
value less costs to sell.
 Identification DEFINITION of INVENTORIES
AS IN MFRS 102
Scenario 1
TAPAH AUTO BHD owns a number of motor vehicles. The majority of the • Inventories are assets:
vehicles are held to be sold to the public as part of the ordinary course of
business of the company. The other vehicles are used for a period of five a) Held for sale in the ordinary course of
years by salesmen employed by the company to identify potential
customers and to facilitate sales.
business;

Are the motor vehicles to be sold assets?

An asset is a resource controlled by the entity as a result of past events and
b) In the process of production for such sale;
from which future economic benefits are expected to flow to the entity. or
The motor vehicles to be sold are assets of the company. The motor vehicles
are physical resources controlled by the company (to be sold at the company’s c) In the form of materials or supplies to be
discretion), purchased by the company (past event) and sales of motor vehicles
are expected to result in the flow of cash to the company from its customers consumed in production process or in the
(future economic benefits).
rendering of services.

Recognition BUSINESSES WITH

INVENTORIES
Scenario 1
TAPAH AUTO BHD owns a number of motor vehicles. The majority of the
vehicles are held to be sold to the public as part of the ordinary course of
business of the company. The other vehicles are used for a period of five
years by salesmen employed by the company to identify potential MANUFACTURING
customers and to facilitate sales.
TRADING ENTITIES
ENTITIES
•Goods purchased for resale •Finished goods produced
Are the motor vehicles to be sold items of inventories? •Work in progress / process
•Raw materials
Yes, the motor vehicles to be sold are items of inventories. The motor vehicles
to be sold do not satisfy the definition of an item of property, plant and
equipment. They are tangible assets, but they are held to be sold in the
ordinary course of the company’s business. They are not held for use in the
production or supply of goods or services, administration purposes or for
rental to others.
 DETERMINING OWNERSHIP OF KAKIAYU FOB SHIPPING POINT GEGIRL
SHOES,
SINGAPORE
BHD
INVENTORIES TERMS:
FOB SHIPPING
GOODS IN TRANSIT POINT

➢ Destination: Gegirl Shoes, Singapore

• Supplier: KAKIAYU BHD
➢ Received the shoes on 1 July Year 18
• 28 June Year 18 - Shoes were loaded onto
➢ Financial year end – 30 June Year 18
• Goods in transit (GIT) should be included in the inventory of the lorry
the company that has legal title to the goods. • Total value RM35,000
• Transportation charges RM2,000
•Legal title is determined by the terms of the sale: • Financial year end – 30 June Year 18
i. free on board (FOB) shipping point
ii. Free on board (FOB) destination • The risks and rewards of ownership was ➢ The title or ownership to the shoes
transferred to Gegirl Shoes on 28 June changed hands at shipping point (on 28
• When the terms are FOB shipping point, ownership of the
Year 18. June Year 18).
goods passes to the buyer when the public carrier accepts the • The title or ownership changed hands on ➢ The risks and rewards of ownership
goods from the seller. The buyer pays freight costs. 28 June Year 18. was transferred to Gegirl Shoes on 28
• When the terms are FOB destination, ownership of the goods • RM35,000 EXCLUDED from KAKIAYU June Year 18.
BHD’s inventories – fye 30 June Year 18. far210 - hh RM35,000 + 2,000 INCLUDED as 10
remains with the seller until the goods reach the buyer. The ➢
seller pays freight costs. Gegirl Shoes’ inventories as at 30 June

KAKIAYU FOB DESTINATION GEGIRL

BHD
SHOES,
SINGAPORE GOODS IN TRANSIT
TERMS:
FOB
DESTINATION

• Supplier: KAKIAYU BHD ➢ Destination: Gegirl Shoes, Singapore

• 28 June Year 18 - Shoes were loaded onto the ➢ Received the shoes on 1 July Year 18
lorry. Total value RM35,000 ➢ Financial year end – 30 June Year 18
• Transportation charges RM2,000
• Financial year end – 30 June Year 18

• NO title or ownership to the shoes changed

hands on 28 June Year 18. ➢ The title or ownership to the shoes
• The risks and rewards of ownership was NOT changed hands at destination (on 1 July
transferred to Gegirl Shoes on 28 June Year 18. Year 18).
• KAKIAYU BHD paid the RM2,000 ➢ The risks and rewards of ownership
[transportation cost] was only transferred to Gegirl Shoes
• RM35,000 to INCLUDE as KAKIAYU BHD’s on 1 July Year 18.
inventories as at 30 June Year 18. far210 - hh ➢ RM35,000 NOT INCLUDED as 11
Gegirl Shoes’ inventories as at 30 June
DETERMINING OWNERSHIP OF GOODS ON CONSIGNMENT
CONSIGNEE
INVENTORIES CONSIGNOR
[AGENT]
CUSTOMERS

CONSIGNED GOODS

• In some line of business, it is common to hold the goods for

other parties and try to sell the goods for them for a fee, but
without taking ownership of the goods. • TO RECOGNISE REVENUE ● TO RECOGNISE
•These are called consigned goods. FROM 20 BOOKS SOLD BY COMMISSION REVENUE
•Many car, boat and antique dealers sell goods on consignment AGENT FROM 20 BOOKS SOLD
to keep their inventory costs down and to avoid the risk of • TO RECORD 30 BOOKS AS ● CANNOT RECOGNISE
INVENTORIES 30 BOOKS AS
purchasing an item that they will not be able to sell. CONSIGNEE’S
• THE RISK & REWARDS OF
•Under consignment agreement, the dealer would not take the OWNERSHIP ARE NOT INVENTORIES AS THE
ownership of the stock. Thus, it would not be included in the TRANSFERRED TO 30 BOOKS BELONGS TO
Referdealer’s
Exampleinventory.
in the handout (Jenny Case PAGE 4 ) CONSIGNEE CONSIGNOR
far210 - hh 14
• STILL HAS CONTROL ON
THE 30 BOOKS

Measurement of Inventories Measurement of Inventories

• Initial Measurement
Inventories shall be initially be recorded on the basis of costs incurred
(Liong Tong, T. , 2017)
• Initial Measurement
The cost of inventories shall comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their
present location and condition. (MFRS 102, Para 10)

COST OF PURCHASE COST OF CONVERSION

• purchase / invoiced price •Production costs

• Less : trade discount, rebates, other allowances & GST paid •Cost directly related to the units produced:
•Add: Directly attributable costs of purchase (import duty, purchase tax, transport, handling cost, freight insurance. •Direct material
•Direct labour
•Variable production overhead
•Fixed production overhead (allocated)
 Measurement of Inventories Measurement of Inventories
COSTS EXCLUDED • Subsequent Measurement
Basis of Inventory Valuation

Inventories shall be measured at the LOWER

OF cost and net realizable value (MFRS 102,
para 9).

NET REALISABLE VALUE (NRV)

Estimated selling price in the normal course of business
LESS estimated costs to complete AND estimated costs to
make a sale [MFRS102, para 6]

Example 4
Example 5
Cost of inventory : RM50,000 At the end of Year 5, SaZa Bhd had 1,000 units of shampoo in its
Net realisable value (NRV) of inventory : RM48,000 inventory. These shampoos were purchased
at RM15 per unit. Selling price per unit is RM25 and the estimated
selling cost is RM3 per unit.
COST NRV Calculate:
RM50,000 compare RM48,000 a) Cost
b) NRV
c) Inventory value

Choose the lower

Solution 4
a) Cost = 1,000 x RM15 = RM15,000
b) NRV = 1,000 x (RM25 – RM3) = RM22,000
c) Inventory value = the lower of cost and NRV.
Inventory
Since Cost < NRV, thus the inventory value = RM15,000.
value is
RM48,000
 Example 6 Example 7
Based on the same facts as above, except that the inventory is
XYZ Bhd is a used car dealer. The following is information
damaged and causing the selling price of each shampoo to drop
about its inventory of cars at the end of the year:
at RM12. Determine the inventory value.
RM

Solution 5 Cost of cars 80,000

Cost = 1,000 x RM15 = RM15,000 Cost incurred to recondition the cars 50,000
NRV = 1,000 x (RM12 – RM3) = RM9,000 Additional costs to be incurred to sell the cars 20,000
Since NRV < cost, thus the inventory value = RM9,000.
Estimated selling price of the cars after 153,000
recondition

Determine the inventory value.

Accounting Treatment
Solution 7 RM
If cost < NRV, the inventory value remains at cost.
If NRV < cost, the inventory value which was based on cost needs to be
written down to NRV.
Write down to NRV is treated as an expense in the period in which write
Cost of cars 80,000 down occurs.
Cost incurred on reconditioning 50,000
Total cost 130,000 Accounting entries to write down inventory value:
Dr. Cost of sales / COGS xx
RM Cr. Inventories xx

Selling price 153,000 MFRS 102 requires that “when inventories are sold, the carrying amount
of those inventories shall be recognized as an expense in the period in
Less: cost to sell (20,000)
which the related revenue is recognized. The amount of any write down
NRV 133,000 of inventories to net realizable value and all losses of inventories shall be
recognized as an expense in the period the write-down or loss occurs….”
The lower is cost, thus the inventory value is based on cost which is RM130,000.
 Example 8
Inventories as at year end 31 December 20x9 recorded at Basis for writing down of
RM400,000. However, as at year end the management realize
that 20% of the total inventories were obsolete and the
inventories to NRV
company manage to sell the goods for RM50,000 only. Writing down of inventories to NRV shall either be:
a) On item by item basis
Required: b) On groups of similar items basis
Discuss the accounting treatment in accordance to MFRS
102 and the amount involved. Whichever basis is used shall be consistently applied.
Solution 7
The total inventories are to be marked down to RM370,000 for the year Writing down of inventories to NRV by category/class of
ended 31 December 20x9 inventories (for examples, raw materials, finished goods, work
Dr. Cost of Goods sold RM30,000
in process) or in total inventory basis (entire inventories) is
Cr. Inventories RM30,000
not permitted by MFRS 102.

Refer EXAMPLE 5 (TEXT BOOK PAGE 211)

Example 9 Solution 9
MyCar Enterprise specialises in buying and selling cars in Batu Pahat area. a. According to MFRS 102 Inventories, inventory is defined as
Below are data pertaining to unsold cars of the company as at 31 December current assets that:
20x3:
• Held for sale in the ordinary course of business
Hyundai Honda City • In the process of production for such sales
Purchase price per unit RM55,000 RM60,000 • In the form of materials or supplies to be consumed in the
production process or in the rendering of services.
Import duties per unit RM10,000 RM15,000
No of units 5 8
The cars are items of inventory in accordance with MFRS 102
Net realisable value per unit RM67,000 74,500
Inventories because:
Required:
a. Identify whether the cars above are items of inventories in accordance
The cars are held for sale in the ordinary course of business as
with MFRS 102 inventories or items of MFRS 116 PPE. company involves in buying and selling of cars. It is not held for
use in supply of services, even though the cars are tangible items
b. Determine the value of the cars on 31 December 20x3 on an item-by-
item basis in accordance with MFRS 102 inventories. and are expected to be used in more than one period.
b. Cost of purchase of cars = Total purchase price + Total INVENTORY COST FORMULA/METHODS
import duties refer EXAMPLE 3 (TEXT BOOK PAGE 206)
Hyundai (RM) Honda city (RM)
Inventory cost
Total Purchase price 275,000 480,000 formula/methods
Import duties 50,000 120,000
Cost of purchase 325,000 600,000
Specific First In First Weighted Last in First
identification Out (FIFO) average Out (LIFO)
Value of the closing inventory as at 31 December 20x3 on
item-by-item basis.
Items that are not
ordinarily
CARS COST (RM) NRV (RM) CLOSING
Cost of inventories at The reverse of the FIFO method
Inventories purchased first are sold first

interchangeable
different dates are
Closing inventory are assumed to represent inventory items purchased most recently
aggregated Prohibited by MFRS102 and MPERS

goods and services

INVENTORY produced and
(RM) segregated for specific
projects
Hyundai 325,000 335,000 325,000 (COST)
Items of a high value
Honda city 600,000 596,000 596.000 (NRV) and distinguishable
from other items of
TOTAL 921,000 inventory

INVENTORY SYSTEM

Inventory system

Perpetual inventory system Periodic inventory system

Inventory account is continuously updated for the movement items. Provides a better control of inventories but more expensive Inventory account is only updated periodically, normally after inventory count. Weaker control of inventories but less expensive
 PERPETUAL INVENTORY PERIODIC INVENTORY
SYSTEM SYSTEM
• Journal entries on purchase of inventories • Journal entries on purchase of inventories
Dr Dr
Cr Cr

• Journal entries on sale of inventories

Dr • Journal entries on sale of inventories
Cr

Dr
Dr
Cr
Cr

PERIODIC INVENTORY Presentation & disclosure

SYSTEM
• Journal entries after stock-take/inventory-take PRESENTATION
Dr
Cr Statement of Financial Position as at 31 Dec xx
RM
Dr
Cr
Current Assets
Inventories (based on cost or NRV – W.I.L) XX
Dr
Cr
 Presentation & disclosure
DISCLOSURE
The following disclosures on inventories are
to be made in the financial statements:
• The accounting policies adopted in
measuring inventories including the cost
formula used (e.g. FIFO, weighted average);
• Carrying amount of each category of
inventories,
References
• Tan Liong Tong (2014). “Financial Accounting
and Reporting in Malaysia”, Chap 7, CCH
Malaysia Sdn Bhd, Vol. 1, Sixth Edition.
• MFRS 102 Inventories,
MFRS 102 Inventories Malaysian Accounting
Standards Board (MASB).
• Ng Eng Juan (2009). “A Practical Guide to
financial Reporting Standards (Malaysia)”,
CCH Asia Pte Limited,Second Edition.