IAS - 37

Inventories

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Introduction

 The objectivity of the standard is to provide the bases for

calculation of the cost of inventory recognized as an asset, the
determination of cost, and the recognition of inventories as an
expense.
 Applicability

 The standard applies to all the inventories that are –

 Held for sale in the ordinary course of business
 In the process of production for sale
 In the of materials or supplies to be consumed in the production
process
 In the rendering of service including the cost of the services for which
the related revenue is not recognized.
Non – Applicability of IAS 2

 This standard does not apply to –

 Agricultural and Forest Products
 Minerals and Mineral products

If recognised at realized value in accordance with the practises in

these industries.
 The standard also doesn’t applies to –
 Living plant and animals
 Harvested agricultural produce derived from those plants and
animals.
Measurement and Cost

 Inventories are measured at the lower of cost and net realizable

value.

 Cost of purchase of inventories compromises -

 Purchase price

 Import duties

 Taxes

 Direct costs such as Transport, handling and other costs

 Trade discounts, rebates, and other similar items

Directly attributable to the acquisition of finished goods, material

and services.
Cost of conversion
 This cost of conversion of inventories
 are costs directly related to the units of
production
 Includes systematic allocation of fixed and
variable production overhead that are incurred
in converting materials into finished goods.

 Allocation of fixed production overheads is based upon the

normal capacity of the production facility.

 In the cases where main and by-products are produced,

the cost allocation is the total cost of the main product
minus the net realizable value of the by-product.
Other Cost

 Other cost are included in the cost of inventories to the extent of

where they have been incurred in bringing the inventories to their
present location and condition.

 Costs excluded from the cost of inventories are recognised as

expenses for the period incurred
 Abnormal amounts of wasted materials, labour or other production
cost.
 Storage cost, unless it is nessary in production process before further
production stage.
 Administritive overheads that do not contribute in bringing inventories
to their present location and condition
 Selling cost
 Cost Of Inventories For A Service
Provider
 Measurement
 The meazsurement is done at the cost of the production

 The cost consist of the labour and other cost of personel, directly engaged
in providing the service, including supervisory personnel and attributable
overheads.

 Cost not to be included

 Labour and other costs of sales and general administrative personnel

 Profit margins or non-attributable overheads.

Cost of agricultural produce harvested
from biological assets

 Measurement
 Measured by an entity which has harvested from its biological assets on
initial recognition at their fair value less estimated point of sale cost
at the point of harvest.
Techniques for the measurement of
cost

 Standard cost method:

 Takes into account normal levels of materials and supplies, labour,
efficiency and capacity utilisation.
 Regularly reviewed and revised in the current condition

 Retail Method:
 Used in the retail industry for measuring inventories of large
number of rapidly changing items.
 Measurement is done by reducing the sales value of the inventory
by the appropriate percentage of gross margin.
Accounting treatment of inventories
 Cost of inventories comprises the following
 Purchase cost including import charges
 Cost of conversion
 Other cost such as borrowing cost and design cost
 Cost of inventories excludes
 Abnormal amounts of wasted materials, Labour or other production cost.

 Storage cost, unless it is necessary in production process before further

production stage.
 Administrative overheads that do not contribute in bringing inventories to
their present location and condition
 Selling cost

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Accounting treatment of inventories
 Cost of inventories that are not ordinarily interchangeable and
those produced and segregated for specific projects are
assigned by specific identification of their individual cost.

 Cost formula used :

 Weighted average cost
 FIFO

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Net realizable value
 NRV is measured by estimating selling price less estimated cost
of completion and cost necessary to make the sales.

 Principles for writing down inventory

 Items are treated on an item by item basis
 Similar items are normally grouped together
 Each service is treated as a separate item

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Net realizable value
 Disclosure requirements
 Accounting policies
 Total carrying amount of inventories and amount per category
 Amount of inventories carried at fair value
 Amount of write downs or reversal of a write down.
 Inventory pledged as security for liabilities
 Amount of inventories recognized as an expense

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Methods for valuation of inventories
 FIFO Method
 Assumption : Inventories that are purchased first are sold first.

 Measurement : inventory being valued based on the most recent purchase

 Weighted average method:

 The valuation is done on the weighted average cost of similar items at the
beginning of the period and cost of items purchased or produced during the
period.

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Recognition of expense
 The carrying amount of inventory should be recognized as an expense
when the related revenue is recognised
 When an inventory is written down to net realizable value, the value
written down is recognised as an expense.
 Disclosure in the financial stat

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Difference with Indian GAAP
S. IAS Indian GAAP
No

1. Doesn’t apply to inventories heldThere is no scope exemption in AS 2 for

by commodity broker-traders whoany inventories held by commodity traders.
measure their inventories at fair
value less costs to sell are
recognized in profit or loss in the
period of the change.

2 Difference between the purchaseInventories purchased on deferred

price of the inventories for normalsettlement terms are not explicitly dealt with
credit terms and the amount paidin the accounting standard on inventories.
for deferred settlement terms is
recognized as interest expense

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