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IFRS 1

Hammad Sarwar(HS)

IAS 2 INVENTORIES

VALUATION

INTERCHANGEABLE ITEMS

Inventories
Inventories include • assets held for sale in the ordinary course of business (finished goods), • assets in the production process for sale in the ordinary course of business (work in process), and • Materials and supplies that are consumed in production (raw materials).

Valuation (IAS 2)

Inventories shall be measured at the lower of: (a) Cost (b) Net realisable value

Allowable costs per IAS 2
The cost of inventories shall comprise all of the • Costs of purchase, Purchase price, import duties and other taxes and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services, less trade discount, rebates and other similar items.

Costs of conversion and direct labour, direct expenses and sub-contracted work, Systematic allocation of fixed and variable production overheads incurred in converting materials into finished goods The allocation of fixed production overheads to units of production is based on normal capacity (average over a number of seasons under normal circumstances).

marketing. first out): OR (b) Weighted average cost: . Non-production overheads of designing a product for a specific customer. Interchangeable items Cost formulas The following estimation methods are allowed under IAS 2: (a) FIFO (first in.g. and (b) Estimated costs necessary to make the sale (e. Net realizable value It is the estimated selling price in the ordinary course of business less: (a) Estimated costs of completion. selling and distribution costs). IAS 23 Borrowing Costs identifies some limited circumstances where borrowing costs (interest) can be included in cost of inventories that meet the definition of a qualifying asset. Inventory cost should not include • • • • • • abnormal waste storage costs administrative overheads unrelated to production selling costs foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency interest cost when inventories are purchased with deferred settlement terms.IFRS 2 Hammad Sarwar(HS) • Other costs incurred in bringing the inventories to their present location and condition.

Discuss the accounting treatment of the above items in the financial statements for the year ended 31 May 2007. ABC LLC has spent a total of $15 per pack for repairing and reapplying glue to the envelopes.21-22] For inventory items that are not interchangeable. The following details relate to this product: $ per unit List price – normal selling price 50 Allocation of customer discounts on selling price 2·5 Warehouse overheads until estimated sale date 4 Basic salaries of sales team 2 Cost of product 35 The product is collected from the warehouses of Wader by the customer. inquiry reveals that during the physical stock take. Furthermore. the auditors noted that the subsequent sale price for the inventory at January 15. in the following week. 2006. Accordingly. During the final audit. 2005. It has a significant quantity of a product and needs to evaluate its value for balance sheet purposes. The stock of envelopes was included in the closing inventory as of December 31. provided that the results approximate actual cost. Sales of the product are high. The net realizable value__________ and inventory write-down (loss) amount to_____________ . specific costs are attributed to the specific individual items of inventory June 2007 Q2 b. (4 marks) PRACTICE QUESTIONS EXAMPLE 1 ABC LLC manufactures and sells paper envelops. was $40 each per pack. The standard cost and retail methods may be used for the measurement of cost. Wader is assessing the valuation of its inventory. The reason for its success is that a sales commission of 20% of the list selling price is paid to the salesforce.IFRS 3 Hammad Sarwar(HS) Sundry points • • • • The use of the LIFO (last in first out) method is not permitted. at a cost of $50 each per pack. a water leakage has created damages to the paper and the glue. An entity must use the same cost formula for all inventories having a similar nature and use to the entity. [IAS 2. but it incurs high production costs.

Total paragraphs in IAS 2 42 It was first issued in 1975 . It has not been recorded in company’s bookkeeping system.500 750 250 1.000 500 1. and net realizable value (NRV) per unit of the product lines are as follows: Product line Quantity Cost Estimated Selling price on hand per unit ($) per unit ($) Sofas Dining tables Beds Closets Lounge chairs 100 200 300 400 500 1. beds. under IAS 2 using the “lower of cost and NRV” principle. and lounge chairs. 200X. how this transaction should be treated in the financial statements at 31 march 2009. EXAMPLE 3 (H.A) Moonstruck Enterprises Inc. on which sales commission of 10% will be payable. 200X. dining tables. At December 31. cost per unit.IFRS 4 Hammad Sarwar(HS) EXAMPLE 2 During an inventory count on 31 March 2009 items that had cost $6 million were identified as being either damaged or slow moving. It is estimated that they will only realise $4 million in total.020 450 1. quantity on hand. closets. is a retailer of Italian furniture and has five major product lines: sofas.600 770 200 Selling expenses are 10% of the proceeds Required Compute the valuation of the inventory of Moonstruck Enterprises at December 31.