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Inventories

IAS 2

Objective
The objective of this standard is to prescribe the accounting treatment for inventories.

Scope
IAS 2 excludes certain inventories:
work in process arising under construction contracts (see IAS 11 Construction Contracts)

financial instruments (see IAS 39 Financial Instruments: Recognition and Measurement)


biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41 Agriculture).

Definitions
Inventories are assets:
Held for sale in ordinary course of business In the process of production for such sales Material or supplies used in production process or to render services

Net Realizable Value


It is the estimated selling price less the cost to complete and sell

Measurement of inventory
Inventory should be measured at lower of cost or net realizable value

Realisable value
Realisable value is, of course, the price the organisation receives for its inventory from the market. However, getting this inventory to market may involve
additional expense and effort in repackaging, advertising, delivery and even repairing of damaged inventory.

Which Value you should assign to inventory?


Item Cost (Rs) Net realisable value (Rs.)
9,000 1 No. 876 7,000

2 No. 997 12,000

12,500

3 No. 1822 8,000

4,000

Cost of inventories
Cost should include all:

costs of purchase (including taxes, transport, and handling) net of trade discounts received
costs of conversion (including fixed and variable manufacturing overheads) and

other costs incurred in bringing the inventories to their present location and condition

Costs not to be included in the inventory cost


Abnormal losses of material, labor etc

Storage costs
Administrative overheads that are not to bring the inventories at present location or condition Selling costs Borrowing costs (with some exceptions) foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency

Techniques of measurement of cost


Standard cost method Retail method

Cost Formulas
Items which are not ordinarily interchangeable should be valued at individual cost basis FIFO and treatment WAVC are benchmark

LIFO is no longer allowed

Recognition as an expense
The inventory cost should be recognized as an expense in the period in which their revenue is recognized

Disclosure
Policy to measure inventories including cost formula Total carrying amount of inventory with classification Carrying amount of inventory carried at net realizable value The amount of any reversal of any write-down of inventory that is recognized as revenue in the period The circumstances and events that have caused this reversal

Carrying amount of inventories pledged as security against a liability

Activity
1. Value the following items of inventory:
Material costing $12,000 bought for processing and assembly for a profitable special order. Since buying these items, the cost price has fallen to $ 10,000

Equipment constructed for customer for an agreed price of $ 18,000. This has recently been completed at a cost of $ 16,800. It has now been discovered that , in order to meet certain regulations, conversion with an extra cost of $ 4,200 will be required. The customer has accepted partial responsibility and agreed to meet half the extra cost.

Practise Question
Q1. The cost of inventories held by Bonus Ltd. is Rs. 350,000. The estimated selling price of inventories is Rs. 300,000. The company pays Rs. 5% commission on sales to manager. You are required to calculate the value at which inventories should appear in the Statement of Financial Position.