A GUIDE TO INTERNATIONAL FINANCIAL

REPORTING
Chapter 10
Inventories (IAS 2)
2024

APPLIED FINANCIAL ACCOUNTING A/ ADVANCED FINANCIAL REPORTING

LECTURER: DR JD MVUNABANDI
JEANM2@DUT.AC.ZA
INVENTORIES

STUDY OBJECTIVES:
1. CONCEPT OF INVENTORIES
2. COST OF INVENTORIES
3. COST FORMULAS
4. OVERHEADS
5. NET REALISABLE VALUE
6. DISCLOSURE

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INVENTORIES

REFERENCES:
a) IAS 2
b) Chapter 10: A Guide to International Financial Reporting

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 1. CONCEPT OF INVENTORIES

1.1 Held for sale in the ordinary course of business (finished goods) IAS 2:6
 or in the process of production for such sale (e.g. WIP)
 NB: this is distinct from IFRS 5 ‘held for sale’

1.2 Includes materials/supplies to be consumed:

 in production process (e.g. raw materials)
 in rendering of services (e.g. labour costs)

1.3 Inventories of a service provider!

Perpetually : Continual update for sales

Periodically: Occasional update for sales

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 2. COST OF INVENTORIES

2.1 The valuation rule IAS 2:9

 ‘lower of cost or net realisable value’

2.2 Components of cost IAS 2:10

 cost of purchase + transport / handling IAS 2:11
 costs of conversion – labour and overheads IAS 2:12-14
 cost to bring inventories to existing condition /location IAS 2:15

Costs of purchase including non-recoverable taxes, transport and handling (less trade discounts,
rebates and similar items), irrecoverable taxes, and transport, handling and other costs directly
attributable to their acquisition.

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2. COST OF INVENTORIES

2.3 When inventories are sold, the carrying amount of those inventories should be recognised as an
expense in the period in which the related revenue is recognised. Dr COS , Cr Inventory

2.4 Costs excluded from inventory costs IAS 2:16

Abnormal wastage materials, labour or other production costs;
Storage costs unless those costs are necessary in the production process before a further production
stage;
Administrative overheads that do not contribute to bringing inventories to their present location and
condition; and
Selling costs.

ILLUSTRATIVE EXAMPLES 10.1 and 10.3 Chapter 10, pages 4 and 6

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3. COST FORMULAS

3.1 For non-interchangeable items:

− Specific identification IAS 2:23

For interchangeable items, assign costs using FIFO or WAC IAS 2:25
- The cost of inventories of items that are ordinarily interchangeable and have
not been produced and segregated for specific projects

ILLUSTRATIVE EXAMPLE 10.2 Chapter 10, page 5

3.2 Can an entity use both FIFO and WAC?

Use of LIFO is prohibited?

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3. COST FORMULAS

3.3 On 1st June 2015 a company held 400 units of finished goods valued at R22 each. During
June, the following transactions took place
Date Units Purchased Cost per Unit
10/06/15 300 R23
20/06/15 400 R24
25/06/15 500 R25
Goods sold out of inventories during December were as follows:
Date Units Sold Sales Price per Unit
14/06/15 600 R30.00
21/06/15 400 R31.00
28/06/15 100 R32.00
Required: Calculate the value of closing inventories using a) FIFO
b) Weighted Average Cost

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3. COST FORMULAS

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3. COST FORMULAS

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4. TREATMENT OF OVERHEADS

4.1 Include both variable and fixed overheads IAS 2:13

4.2 Allocate fixed production overheads to the cost of conversion based on

normal capacity
◦ Actual level of production may be used where is approximates normal capacity
◦ Where actual production exceeds normal capacity, use actual production to
prevent inventory from being overstated

ILLUSTRATIVE EXAMPLES 10.4 Chapter 10, page 8

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 INVENTORY
4.3 Allocate cost on a rational and consistent basis IAS 2:14
ILLUSTRATIVE EXAMPLE 10.5 Chapter 10, page 9
4.4The cost of foreign inventories is translated into Rand using the spot rate on “risks and rewards”
date
SEE CHAPTER 9 OF TEXT
Key Points to remember:
Inventories can be finished goods, work in progress, raw materials and consumables
Inventories are measured at low cost Or NRV
Inventories may consist of a number of components such as costs of purchase, costs of conversion, and other costs to
bring the inventories to their present location and condition.
Inventories are valued at either the specific identification method (FIFO or WAC and LIFO).
Fixed and variable production overhead are included in the cost of inventories
Rebates (Reduce the inventory cost=against purchase cost)
Rebates (will not reduce inventory costs= against selling cost)

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4. OVERHEADS

Total Overhead Costs

IAS 2:13

Production Overhead Costs Other Overhead Costs

Variable Fixed

Only Allocated to
Allocated to
inventory in
Allocated based on
“normal capacity”
inventory in
direct relation
exceptional situations
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 - General fall in market prices for the goods.
- Damage to the goods.
- Obsolescence.
- Additional costs needed to complete manufacture.

5. NET REALISABLE VALUE

5.1 NRV is the estimated selling price in the ordinary course of business,
less the estimated costs of completion and
the estimated costs to make the sale.
https://realmuddle.wordpress.com/2013/12/28/what-is-net-realizable-value/

5.2 There is a risk that inventories will be sold lower than cost:
 general decrease in market prices for goods
 damage to the goods
 obsolescence
 additional costs to complete manufacturing process

ILLUSTRATIVE EXAMPLE 10.6 Chapter 10, page 10

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5. NET REALISABLE VALUE cont.

5.3 Fluctuations in post-reporting period: IAS 2:30

 is it taken into account in arriving at NRV? use last available selling
price, including selling price realised after the reporting date which
usually provides evidence of conditions that existed at a reporting date
and thus should be considered as adjusting events after the reporting
period

5.4 Net realisable value (NRV) of raw materials IAS 2:32

 NB: only written down if finished good expected to sell below cost
 use replacement cost as indicator of NRV

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 5. NET REALISABLE VALUE cont.
5.5 Assess NRV in each period
 amount of write-down may be reversed IAS 2:33

5.6 Write-down to NRV

 expensed in the period of write-down
 reversal of write-down is recognised as a reduction in amount of inventories expensed
in period of reversal IAS 2:33
Key points to remember:
 Writing down inventory to NRV ensures that inventory is not valued in excess of the
amount expected to be realised upon sale
 Write downs can be reversed in subsequent periods if the circumstance which caused
the inventory to be written down no longer exists, of if the NRV has increased due to
changes in economic circumstances.

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6. DISCLOSURE

6.1 Accounting policies adopted, including cost formulas IAS 2:36

6.2 Statement of P/L&OCI IAS 2:38

 amount of inventories recognised as expense in period
 amount of write-downs expensed in period
 any reversal of write-downs recognised as reduction of expense
 circumstances/ events that led to reversal

6.3 Statement of financial position IAS 2:37

 total carrying amount of inventories
 carrying amount in appropriate classifications e.g. raw materials
 CA of inventories carried at fair value less costs to sell

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