Section 13

Overview

• Objective
• Scope
• Definition
• Measurement of Inventories
• Cost of Inventories
• Cost Formulas
• Impairment of Inventories
• Recognition as an Expense
• Disclosure
• Differences between IFRS for SMEs and Full IFRS
 Objective

The objective of this section

is to prescribe the accounting
treatment for inventories
 Scope

• This section applies to all inventories, except:

(a) work in progress arising under construction
contracts (see Section 23 Revenue).
(b) financial instruments (see Section 11 and 12).
(c) biological assets related to agricultural activity
and agricultural produce at the point of harvest
(see Section 34 Specialized Activities).
 Definition
• Inventories are assets:
(a) held for sale in the ordinary course of
business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be
consumed in the production process or in the
rendering of services.
Types of Inventories

1.RAW MATERIAL
2.WORK IN
PROCCES
3.FINISHED GOODS
4.CONSUMABLES

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Measurement of Inventories

An entity shall measure

inventories at the lower of
cost and estimated selling
price less costs to complete
and sell.

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 Cost of inventories
An entity shall include in the cost of
inventories all costs of
 Purchase
 Costs of conversion and
Other costs incurred in bringing the
inventories to their present location and
condition.

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 Cost of Purchase

purchase price +

Import duties and other taxes +

Transport& handling

Less :- Discount and rebate

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 Cost of Purchase
• Purchase price
• Costs of
conversion • Discounts,
• Additional
• rebates, etc
direct costs
(including - • Refundable =
Cost of
inventories
non- • taxes
refundable
taxes)

• Exclude finance costs and

• General overheads
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 continued
Costs of conversion includes:-

.
Direct labor

Production overheads

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 Allocation of Production Overheads.
• Fixed production overheads are allocated to the costs
of conversion based on the normal capacity of the
production facilities.
• The amount of fixed overheads allocated to each unit
of production is not increased as a consequence of low
production or idle plant.
• Unallocated overheads are recognized as an expense
in the period in which incurred.
• In periods of abnormally high production, the amount
of fixed overhead allocated to each unit of production
is decreased so that inventories are not measured
above cost. prepared by Redwan , Hassen and Kibruysf
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 Cost Excludes

(a) abnormal amounts of

wasted materials, labor or (d) selling costs.
other production costs;

(b) storage costs, unless (c) administrative overheads

those costs are necessary in that do not contribute to
the production process bringing inventories to their
before a further production present location and
stage; condition; and

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 Examples
1. An entity stores its finished goods in a rented
warehouse.
2. An entity rented two floors in a building. The first
floor is occupied only by the production staff. Half
of the second floor is occupied by the entity’s
administrative staff and the other half is occupied
by its sales team.
3. 30 A retailer incurred staff costs of CU10,000 for
its sales personnel and CU5,000 in advertising
costs.
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 Cost Formulas
The costs of inventories are assigned on the

Specific identification

First-in-first out (FIFO),

Weighted average
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 Specific identification
Specific identification is used for:
 Items not ordinarily interchangeable
 Goods or services produced and segregated for
specific projects

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 Cost Formulas
• Homogenous inventory items that cannot be
separately identified are assigned by using the
FIFO or weighted average cost formula.
• The last-in-first-out method (LIFO) is not
permitted by the Standard.
• A consistent cost formula must be used for all
inventories of a similar nature. For inventories
with a different nature or use, different cost
formulas are justified
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 Impairment of inventories

At each reporting date the entity must

assess whether any inventories are
impaired. The assessment is made by
comparing the carrying amount of
each item of inventory (or group of
similar items) with its selling price
less costs to complete and sell.

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 Impairment of inventories
• This section requires the entity to measure the
inventory at its selling price less costs to
complete and sell, and to recognize an
impairment loss.
• also require a reversal of a prior impairment in
some circumstances.

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 Impairment of inventories

Reasons for NRV becomes lower than the cost:-

Increase in
Damage/ Falling in
cost of
obsolescence selling price
complete

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 Reversal of Impairment
• At each subsequent reporting date, the entity
should make a new assessment of the selling
price less cost to complete and sell.
• An impairment charge may be reversed when
the circumstances that previously caused
inventories to be impaired no longer exist, or
when there is clear evidence of an increase in
selling price
• The reversal is limited to the amount of the
original impairment loss.
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 Recognition as an expense
• When inventories are sold, the entity shall
recognize the carrying amount of those
inventories as an expense in the period in which
the related revenue is recognized.
• However, where a section of the Standard
requires or permits the capitalization of the
carrying amount of the inventories used in the
construction or development of certain assets
(such as self-constructed property, plant, and
equipment) prepared by Redwan , Hassen and Kibruysf
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 Examples
1. On 14 December 20X5 a machine manufacturer sold an item of
machinery it manufactured in 20X5 to a customer for CU8,000
cash. The cost of the machine was CU5,500. The customer took
immediate delivery of the inventory.
2. An entity manufactures pens. In 20X1, finished goods (pen
inventories) with a cost of CU100,000 were destroyed by fire.
The entity is not insured against fire.
3. An entity manufactures hammers for sale to its customers.
However, its uses some of the hammers that it produces as
equipment in its production process.

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 Disclosures
• An entity shall disclose the following:
(a) the accounting policies adopted in measuring inventories,
including the cost formula used.
(b) the total carrying amount of inventories and the carrying
amount in classifications appropriate to the entity.
(c) the amount of inventories recognized as an expense during
the period.
(d) impairment losses recognized or reversed in profit or loss in
accordance with Section 27.
(e) the total carrying amount of inventories pledged as security
for liabilities.
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 Comparison with full IFRSs
Full IFRSs
1. Guidance on measuring
estimated selling costs less
costs to complete and sell.
2. Capitalization of borrowing
costs is required.
3. Less disclosure is required.
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IFRS for SMEs
1. Less guidance on measuring
estimated selling costs less
costs to complete and sell.
2. Capitalization of borrowing
costs is not allowed.
3. Less disclosure is required.
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