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IAS2Inventories(detailedreview) OBURAPGuide

Wednesday,January29,2014 Print Email 0

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Objective
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ThisStandarddealswiththeaccountingtreatmentofInventories.Themainissuesarethedetermination
ofthecostofinventoryandNetRealizableValue,itssubsequentaccountingtreatment,andtheguidance
onthecostformulasforthevaluationofinventories.

Scope

Therequirementsofthisstandardareapplicablefortheaccountingtreatmentofinventories.However RSSArticles
thisstandarddoesnotdealwiththefollowing

(a)Theworkinprogressrelatedtoconstructioncontracts,whicharecoveredunderIAS11
LastAccounting
(b)Theagriculturalandforestproductsaftertheharvestrelatedtotheagriculturalactivity,andmineral News
productsatinitialrecognitionwhicharecoveredunderotherapplicablestandards
M&ADealActivityReached
(c)Thestockbrokersortraderswhoregularlybuyandsellcommoditiesforothersorontheirown itshighestpointSince2008
accountforthepurposeofshorttermprofittakingormargin
RecentACCAReportonthe
Definitions IncreasingscopeofShared
Inventory: Services

Thesearetheassetswhichinclude MicrobusinessesOpinion
withRegardstoMakingTax
(a)Rawmaterialheldforuseintheprocessofproductionorforrenderingofservices DigitalProposal

(b)Workinprocessforthepurposeofsaleinthenormalcourseofbusiness AccountantscanPlayan
ImportantRoleinReducing
(c)Finishedgoods(producedorpurchased)whichareheldforsaleinthenormalcourseofbusiness. Corruption

NetRealizableValue: AATHasBeenApprovedas
anApprenticeAssessment
Itisdeterminedastheestimatedsellingpricelessestimatedcosttocompleteandlesstheestimated Organization
sellingexpenses.Itisthenetamountthatanentityexpectstorealizefromthesaleofinventoryinthe
normalcourseofbusiness. IPSAS40,NewPublic
SectorAccountingStandard
MeasurementofInventories IssuedbytheIPSASB
Theentitywillmeasuretheinventoryatreportingdateattheloweroff
IAASBReleasesitsTwo
(a)Costoftheinventoryand yearWorkPlantoEnhance
AuditQuality
(b)ItsNetRealizableValue

Allaccountingnews
Thisisinaccordancewiththeprudenceconcept.

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CostofInventory
Have10minutestorelax?
Thecostofinventoryincludesitsoriginalpurchasepriceanycostofconversionandanyotherdirectly
Playourunique
relatedcostincurredinbringingtheinventorytoitspresentconditionandlocation.Itwillbedetermined
Balancegame
as
PlayTheGame

BasicListPrice

LessanyTradeDiscountorRebate,

Plusanydirectlyrelatedcostwhichincludes:Transportationcost,SalestaxandImportduties(if
nonrefundable),anylegalcharges,handlingcosts,anyothercostincurredfortheacquisitionof
finishedgoodsorrawmaterial

Conversioncosti.e.(DirectlaborandProductionOverheads)

Anyothercostwhichisnecessarytobringtheinventoryintoitspresentconditionandlocationsuch
asdesigningcostorstoragecostifessentialbeforeuseinproductionprocess.

ConversionCost

Conversioncostisthecostofconvertingtherawmaterialintofinishedgoodsanditencompasses
(DirectlaborcostandProductionOverheads)

Productionoverheadsincludefixedandvariableoverheads

Fixedproductionoverheadsarethosewhichremainfixed,irrespectiveofthelevelofproductionand
theseareallocatedonthebasisofnormaloraveragecapacity.

Thenormalcapacityshouldtakeintoaccounttheproductionlossduetoplannedrepairand
maintenance.

Iftheactualproductionislowerthanbudgeted,thenunallocatedoverheadswillbechargedto
statementofprofitorlossasexpense.

Iftheactualproductionishigherthanthebudgeted,thenfixedoverheadallocatedtoeachunit
shouldbedecreased,onthebasisofactualproduction

Variablesproductionoverheadsarethosewhichvarywiththelevelofproductionandareallocated
onthebasisofuseofsuchfacility.

Notes:

(a)Followingarethecostswhichwillnotberecordedaspartofcostofinventoryandwillbechargedto
thestatementofprofitorlossasexpensewhichincludes:

Anyamountofabnormallossduetowastedmaterialorlabor.

Storagecostifitisnotnecessarybeforeaproductionprocess

Anyadministrativeandsellingoverheads.

(b)Ifproductionofinventoryisfinancedthroughaloanandinventorytakesasubstantialtimeperiodto
getreadyforsaleorintendeduse,thenanyrelatedinterestcostwillbecomethepartofcostofinventory
asperIAS23.
(c)Iftheinventoryispurchasedonextendedcreditperiodorondeferredinstallmentbasis,thenthecost
ofsuchinventorywillbeitsCashPriceEquivalentanyexcesspaidoverthecashpricewillbetreatedas
Interestexpensewhichwillberecognizedovertheperiodofcredit.

CostofInventoryofaServiceProvider:

Thecostofinventoriesofaserviceproviderincludesthecostofdirectlabororpersonnelwhoare
engagedinrenderingtheservicesandotherdirectlyattributablecosts.However,itshouldnotinclude
anyadministrativeandsellingoverheads,andprofitmargins.

CostMeasurementTechniques

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Theentitycanusethefollowingcostmeasurementtechniquestodeterminethecostofinventorywhich
includes:

a)StandardUnitCostMethod

Underthismethod,thecostofinventoryisdeterminedbytakingintoaccountnormaldirectmaterialcost,
laborcostanddirectlyattributableoverheads.

b)RetailPriceMethod

Thismethodisnormallyusedbytheentitiesengagedintheretailbusinesswithlargenumberofitemsin
inventoryhavingsimilarmargins.Thecostofinventorywillbedeterminedbydeductingthemarginfrom
thesellingpriceofsuchinventoryitems.

CostMeasurementFormulas

Thecostofitemsofinventorythatarenotordinarilyinterchangeableordifferentinnatureandthe
goodswhichareproducedforaspecifiedprojectwillbedeterminedbyspecificidentificationoftheir
individualcostincurredonsuchitems.

Thecostofitemsofinventorythatareordinarilyinterchangeableorsimilarinnaturecanbe
determinedbyusingfirstin,firstout(FIFO)methodorweightedaveragecostmethod.

UnderFIFOmethodtheunitsofinventorywhicharepurchasedorproducedfirstaredeemedtobe
soldfirstandtheunitsremainingintheinventorywillbewiththemostrecentprices.

Underweightedaveragecostmethod,aweightedaveragecostperunitiscalculatedbytakinginto
accountthecostoftheunitsatthestartoftheperiodandthecostoftheunitswhicharepurchased
orproducedduringtheyearonperiodicbasisorwhennewshipmentisreceived.

ThisStandardrequiresthattheentityshouldusethesameformulaforalltheinventoriesindifferent
segmentsofthebusinessbuthavesamenatureanduse.

NetRealizableValue

Ifthecostofinventoryexceedsthevaluewhichisexpectedtobereceivedfromitsultimatesale,
thentheinventorywillbewrittendowntoitsnetrealizablevalue.

Thenetrealizablevalueofinventorymayfalldownbecauseofincreaseincost,fallinsellingprice,
physicaldamageorobsolescence.

Itshouldbethereliableestimateonthedateofmeasurementconsideringalltherelevantfactors.

IfthecostofinventoryfallslowerthanNRV,theneachitemofinventoryshouldbewrittendownto
itsNRVonindividualbasis.However,thismaybeapplicableupongroupofitemsininventoryifthey
aresimilarinnatureorultimatepurpose.

TheentityshouldconsiderthepurposeoftheinventoryindeterminationofitsNRVsuchas,
whetheritisheldforsaleunderafirmcontractorforgeneralsalepurpose.

Therawmaterialwhichisheldbytheentityforuseinproductionoffinishedgoodsneedsnottobe
writtendownbelowitscost,ifthefinishedgoodsinwhichsuchmaterialwillbeusedareexpectedto
besoldataboveitscost.However,ifthefinishedgoodsinwhichsuchmaterialwillbeusedare
expectedtobesoldatlessthanitscost,thenthecostofsuchrawmaterialwillbewrittendowntoits
NRV.

Ifthesameexistinginventoryisheldatasubsequentreportingdate,theNRVoftheinventorywill
beremeasuredateachsubsequentreportingdate.Ifsubsequentcircumstancesindicatesthat
NRVofinventoryhasincreased,forwhichawritedownhasbeenrecordedinthepreviousperiod,
thereversalofwritedownwillbemadeuptotheextentoforiginalwritedownmadeintheprevious
period.

RecognitionasanExpense
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Thecarryingvalueofinventorywillberecordedasexpenseintheperiodinwhichsuchinventoryis
sold.However,iftheinventoryisusedintheconstructionofanotherassetthenthecostofsuch
inventorywillbecomethepartofcostofotherasset.

AnylossesrelatedtotheinventoryandwritedownofinventorytoitsNRVwillberecordedas
expenseintherelevantperiodinwhichlossorwritedownarises.

Thereversalofwritedownrelatedtoinventorywillberecordedasreductioninexpenseinthe
periodinwhichreversalofwritedownarises.

Disclosures

TheStandardrequirestheentitytodisclosethefollowing:

Thecostvaluationmethodadoptedbytheentity.

Thecarryingvalueofinventoryattheendofreportingperiod.

Anyamountofwritedowninthevalueofinventory

Thevalueofinventoryrecognizedinstatementofprofitorlossasexpense.

Anyamountofreversalinthewritedownofinventoryandsuchcircumstanceswhichreflectthe
reversalofwritedown.

Anyamountofinventorywhichissubjecttoapledgearrangement.

Thecarryingamountofinventoryaspereachclassificationofinventoriessuchasrawmaterial,
workinprocess,andfinishedgoods.

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Seealso

IAS16Properties,PlantandEquipment(detailedreview)

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