Financial Reporting

ACCOUNTING FOR INVENTORIES (FRS 102)

LEARNING OUTCOMES
At the end of the lesson students should
be able to:
Describe the definition of inventories.
Describe the accounting treatment recommended by
FRS 102 for inventories.
Discuss the nature of inventories.
Explain how this should be accounted for in accordance
with accounting standards.
Describe the accounting treatment recommended by
FRS 102 Accounting for Inventories.

BM0157-3.5-2 Financial Reporting

Accounting for Inventories (FRS 102)

Slide 2 of 15

Definition: Inventories
FRS 102 applies to all inventories except for items
covered by other specific standards such as:
Work-in-progress under construction contracts (FRS 111);
Financial instruments (FRS 132 and FRS 139);
Biological assets (FRS 141)
It also does not apply to measurement of inventories by:
Producers of agricultural and forest products, agricultural produce after
harvesting; minerals and minerals rights, to the extent they are valued at net
reliasable value;
Commodity brokers who measure inventories at fair value less cost to sell.

BM0157-3.5-2 Financial Reporting

Accounting for Inventories (FRS 102)

Slide 3 of 15

Definition of cost
Cost of inventories should comprise of
expenditure which has been incurred in the
normal course of business in bringing the
product or service to its present location and
condition.
Such cost
overheads.

will

include

all

related

production

Cost of purchase purchase price including

import duties, transport and handling cost and
other directly attributable costs less trade
discounts, rebates and subsidies
BM0157-3.5-2 Financial Reporting

Accounting for Inventories (FRS 102)

Slide 4 of 15

Definition of cost (contd)

Cost of conversion
Conversion costs is cost to convert the raw materials
into finished goods.
cost attributable to units of production, eg: direct
labour, direct expenses and sub-contracted work.
(overhead).Some of the overhead will be variable and
others fixed.
Fixed production overheads indirect costs that
remain constant regardless of the level of activity. Eg:
depreciation of factory building and security services;
Other overheads, if any, attributable in the particular
circumstances of the business to bringing the product
and service to its present location and condition.
BM0157-3.5-2 Financial Reporting

Accounting for Inventories (FRS 102)

Slide 5 of 15

Cost of Conversion (contd)

Cost of conversion
Example: XYZ budgets that it will manufacture 500,000 units in year
2. The budgeted fixed production overhead is estimated at RM3
million. The entitys policy is to allocate fixed overhead based on
units of production.
The pre-determined overhead allocation will be:
RM3,000,000/500,000 = RM6 per unit.
In year 2 actual unit produce is only 400,000 units.
The fixed overhead allocated will be RM6 x 400,000 = RM2.4
million. The RM600,000 that is not allocated and is expensed off in
the income statement.
Suppose in year 3, actual production is 600,000 units and overhead
incurred is RM3 million. The allocated overhead will still be RM3
million. Allocated to each unit is RM5 (RM3,000,000/600,000).
Total allocated overhead is RM3 million.
BM0157-3.5-2 Financial Reporting

Accounting for Inventories (FRS 102)

Slide 6 of 15

Definition of cost contd

Production overheads overheads in respect of
materials, labour or service for production, based on
normal activity of business.
Replacement Cost items of stock have sometimes been
stated in financial statements at estimated replacement
cost where this is lower than net reliasable value.
Cost excluded from inventory cost:
Abnormal amount of wastage including labour,
material and overhead;
Storage cost;
Administrative cost;
Selling costs.
BM0157-3.5-2 Financial Reporting

Accounting for Inventories (FRS 102)

Slide 7 of 15

Measurement
Fundamental principle under FRS 102:
Inventories are to be measured/stated at the
lower of cost and net reliasable value.
FRS 102 defines net realisable value as
estimated proceeds from the sale of items
(estimated selling price in the ordinary course of
business) less all further costs to completion and
less all costs to be incurred in marketing, selling
and distributing directly related to the items in
question.

BM0157-3.5-2 Financial Reporting

Accounting for Inventories (FRS 102)

Slide 8 of 15

Measurement
Example: RST has in stock 100 units of product Y
which it had acquired for RM15 per unit. The
stock can be sold at RM21 per unit and the
selling costs is estimated at RM2 per unit. The
net reliasable value of one unit is RM21 less RM2
= RM19. Cost is less than net reliasable value
and so the stock will be disclosed at RM15 x 100
= RM1,500.
Suppose the stock were damaged and could be
sold for RM10 each, the net reliasable value per
unit will be RM8. The stock will be accounted for
at RM8 x 100 units = RM800.
BM0157-3.5-2 Financial Reporting

Accounting for Inventories (FRS 102)

Slide 9 of 15

Matching Costs and Related

revenues of Inventories
The cost of unsold or unconsumed inventories will have
been incurred in the expectation of future revenue.
When this is not arise until a year later, it is appropriate
to carry forward this this cost to be matched with the
revenue when it rises.
If there is no reasonable expectation of future sufficient
revenue to cover the cost incurred (result of deterioration
and obsolescence or change in demand), the
irrecoverable cost should be charged to revenue in the
year under review.

BM0157-3.5-2 Financial Reporting

Accounting for Inventories (FRS 102)

Slide 10 of 15

Methods of Valuation

Standard cost and retail methods

cost.
Specific cost for inventory items
that are not interchangable.
FIFO for inventory items that are
interchangable.
Weighted average for inventory
items that are interchangable.
BM0157-3.5-2 Financial Reporting

Accounting for Inventories (FRS 102)

Slide 11 of 15

Tutorial Questions: FRS 102

1. Give the definitions of inventories under the FRS
102.
2. What are the costs that can be included in the
determination of the inventories?
3. Based on FRS 102, how should the inventories
be recognized and disclosed in the financial
statements?
4. Based on FRS 102, how should the inventories
be measured?
5. What are some of problems faced in determining
the amount at which inventories are stated in the
financial statement?
BM0157-3.5-2 Financial Reporting

Accounting for Inventories (FRS 102)

Slide 12 of 15

What we will cover next

Cash flow statements

BM0157-3.5-2 Financial Reporting

Accounting for Inventories (FRS 102)

Slide 13 of 15

Question and Answer Session

Q&A
BM0157-3.5-2 Financial Reporting

Accounting for Inventories (FRS 102)

Slide 14 of 15

Thank You

BM0157-3.5-2 Financial Reporting

Accounting for Inventories (FRS 102)

Slide 15 of 15