Inventories: IAS 2. JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL...

Inventories: IAS 2Inventories: IAS 2

JOIN KHALID AZIZ

ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.

FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.

COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.

CONTACT: 0322-3385752 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI,

PAKISTAN.

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InventoriesInventories Related standardsRelated standards IAS 2IAS 2 Current GAAP comparisonsCurrent GAAP comparisons IFRS financial statement disclosuresIFRS financial statement disclosures Looking aheadLooking ahead End-of-chapter practiceEnd-of-chapter practice

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Related StandardsRelated Standards

HB 3031 InventoriesHB 3031 Inventories

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FAS 151 Inventory costs—an FAS 151 Inventory costs—an amendment of ARB 43amendment of ARB 43

ARB 43 InventoriesARB 43 Inventories

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IAS 11 Construction contractsIAS 11 Construction contracts IAS 32 Financial instruments: IAS 32 Financial instruments:

presentationpresentation IAS 39 Financial instruments: IAS 39 Financial instruments:

recognition and measurementrecognition and measurement IAS 41 AgricultureIAS 41 Agriculture

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IAS 2 - OverviewIAS 2 - Overview

Objective and scopeObjective and scope MeasurementMeasurement Expense recognitionExpense recognition DisclosureDisclosure

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IAS 2 - Objective and ScopeIAS 2 - Objective and Scope Standards for what costs are Standards for what costs are

recognized as inventory costs and recognized as inventory costs and when these costs are transferred to when these costs are transferred to the income statement as expensethe income statement as expense

IAS 2 excludes construction work-in-IAS 2 excludes construction work-in-progress, inventories of financial progress, inventories of financial instruments, and biological inventory instruments, and biological inventory assets related to agricultural activity assets related to agricultural activity and agricultural products at the point and agricultural products at the point of harvestof harvest

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IAS 2 - Objective and ScopeIAS 2 - Objective and Scope

InventoriesInventories are assets: are assets:

(a)(a) held for sale in the ordinary course of held for sale in the ordinary course of businessbusiness

(b)(b) in the process of production for such in the process of production for such sale, orsale, or

(c)(c) in the form of materials or supplies in the form of materials or supplies to be consumed in the production to be consumed in the production process or in the rendering of process or in the rendering of servicesservices

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IAS 2 - MeasurementIAS 2 - Measurement Inventories are measured at the Inventories are measured at the

lower of cost and net realizable value lower of cost and net realizable value (LC and NRV)(LC and NRV)

Need to know:Need to know:

- what costs are included- what costs are included

- what cost formulas are permitted- what cost formulas are permitted

- how net realizable value is - how net realizable value is determineddetermined

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IAS 2 - MeasurementIAS 2 - Measurement Costs included:Costs included:

1.1. Purchase costsPurchase costs

2.2. Conversion costsConversion costs

3.3. Other inventoriable costsOther inventoriable costs

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IAS 2 - MeasurementIAS 2 - Measurement Purchase costsPurchase costs

- purchase price and all costs directly - purchase price and all costs directly attributable to their acquisition such attributable to their acquisition such as non-refundable taxes, as non-refundable taxes, transportation and handling, reduced transportation and handling, reduced by volume discounts and rebatesby volume discounts and rebates

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IAS 2 - MeasurementIAS 2 - Measurement Conversion costsConversion costs

- direct labour, indirect variable and fixed - direct labour, indirect variable and fixed production overhead costsproduction overhead costs

- variable production overhead: allocate to - variable production overhead: allocate to inventory based on actual usageinventory based on actual usage

- fixed production overhead: allocate to - fixed production overhead: allocate to production based on normal operating production based on normal operating capacity (except when abnormally high capacity (except when abnormally high production)production)

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IAS 2 - MeasurementIAS 2 - Measurement Joint productsJoint products

- Allocate between products on a Allocate between products on a rational basis such as relative sales rational basis such as relative sales value of products when they become value of products when they become separableseparable

- If minor in value, do not allocate: If minor in value, do not allocate: measure by-product at net realizable measure by-product at net realizable value and deduct this amount from value and deduct this amount from main product costsmain product costs

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IAS 2 - MeasurementIAS 2 - Measurement Other inventoriable costsOther inventoriable costs

- limited to costs to bring the inventories to - limited to costs to bring the inventories to their present location and conditiontheir present location and condition- example: amortization of capitalized - example: amortization of capitalized development costs related to inventorydevelopment costs related to inventory- borrowing costs included if for a qualifying - borrowing costs included if for a qualifying inventory item (if measured at FV or inventory item (if measured at FV or produced in large volumes on a repetitive produced in large volumes on a repetitive basis, borrowing costs may, but are not basis, borrowing costs may, but are not required to be capitalized)required to be capitalized)

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IAS 2 - MeasurementIAS 2 - Measurement

Do not add to inventory cost:Do not add to inventory cost: Costs of abnormal wasteCosts of abnormal waste Storage or warehousing costs unless Storage or warehousing costs unless

necessary for next stage of productionnecessary for next stage of production Administrative overheads not Administrative overheads not

associated with productionassociated with production Selling costsSelling costs Financing charges above purchase Financing charges above purchase

price for normal credit termsprice for normal credit terms

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IAS 2 - MeasurementIAS 2 - Measurement Cost formulas permitted should:Cost formulas permitted should:- Assign recent costs to ending inventoryAssign recent costs to ending inventory- Correspond closely with the actual Correspond closely with the actual

physical flow of the goods and servicesphysical flow of the goods and services

- Three permitted: Specific identification, Three permitted: Specific identification, First-in, first-out, and weighted averageFirst-in, first-out, and weighted average

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Specific identification:Specific identification: For inventory items that are not For inventory items that are not

ordinarily interchangeableordinarily interchangeable For goods and services produced and For goods and services produced and

segregated for specific projectssegregated for specific projects

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FIFO and weighted average:FIFO and weighted average: FIFO – cost of latest purchases ends FIFO – cost of latest purchases ends

up in cost of ending inventory, cost up in cost of ending inventory, cost of earliest purchases are in cost of of earliest purchases are in cost of goods soldgoods sold

Weighted average – weighted Weighted average – weighted average cost of all goods available average cost of all goods available for sale ends up in both ending for sale ends up in both ending inventory and cost of goods soldinventory and cost of goods sold

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KPMG : KPMG : The Application of IFRS: ChoicesThe Application of IFRS: Choices

in Practice – International Financial in Practice – International Financial

Reporting StandardsReporting Standards, December , December

20062006

Results indicate that the usage of the FIFO and Results indicate that the usage of the FIFO and weighted average methods are fairly evenly weighted average methods are fairly evenly split by companies reporting under IFRSsplit by companies reporting under IFRS

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CONTACT: 0322-3385752 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI,

PAKISTAN.

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IAS 2 - MeasurementIAS 2 - Measurement Inventories reported at the LC and NRVInventories reported at the LC and NRV Why? So not reported at more than the Why? So not reported at more than the

future cash flows into the company future cash flows into the company from their salefrom their sale

NRVNRV = the estimated selling price in = the estimated selling price in the ordinary course of business less the the ordinary course of business less the estimated costs of completion and the estimated costs of completion and the estimated costs to make the saleestimated costs to make the sale

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LC and NRVLC and NRV example: example: CostCost Rs 80Rs 80 Selling priceSelling price Rs 84Rs 84 Cost to completeCost to complete Rs 5Rs 5 Cost to sell Cost to sell 10% of SP10% of SPNRV: Rs84 - Rs5 - Rs8.40 =NRV: Rs84 - Rs5 - Rs8.40 = Rs70.60Rs70.60

LC and NRVLC and NRV = = Rs70.60Rs70.60

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IAS 2 - MeasurementIAS 2 - Measurement Write-downs are recognized in profit Write-downs are recognized in profit

or loss.or loss. Subsequent write-ups permitted to Subsequent write-ups permitted to

maximum of prior write-downs if:maximum of prior write-downs if:

- changed economic circumstances - changed economic circumstances and NRV has increased, prior and NRV has increased, prior situation no longer existssituation no longer exists

Reversals also taken to profit or lossReversals also taken to profit or loss

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IAS 2 – Expense RecognitionIAS 2 – Expense Recognition Carrying amount of inventory sold is Carrying amount of inventory sold is

expense in same period as the expense in same period as the related revenuerelated revenue

Inventory adjustments (losses, write-Inventory adjustments (losses, write-downs to lower of cost and NRV, downs to lower of cost and NRV, write-down reversals, etc.) are write-down reversals, etc.) are recognized as an adjustment to the recognized as an adjustment to the expense recognized in the periodexpense recognized in the period

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IAS 2 - DisclosureIAS 2 - Disclosure

Disclosures needed for:Disclosures needed for: Accounting policies appliedAccounting policies applied Inventory remaining on statement of Inventory remaining on statement of

financial positionfinancial position Inventory costs recognized in profit Inventory costs recognized in profit

or lossor loss

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Balance-sheet related disclosures:Balance-sheet related disclosures: Carrying amount in each category of Carrying amount in each category of

inventory (materials, WIP, finished inventory (materials, WIP, finished goods, production supplies, goods, production supplies, merchandise) and in totalmerchandise) and in total

Carrying amount of any inventory Carrying amount of any inventory measured at fair value less costs to measured at fair value less costs to sellsell

Carrying amount of inventory pledged Carrying amount of inventory pledged as collateral for liabilitiesas collateral for liabilities

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Income statement-related disclosures:Income statement-related disclosures: Amount of inventory recognized as an Amount of inventory recognized as an

expense (usually cost of sales/cost of expense (usually cost of sales/cost of goods sold)goods sold)

Amount of write-downs to NRV or Amount of write-downs to NRV or other lossesother losses

Amount of any write-down reversalsAmount of any write-down reversals Circumstances that resulted in Circumstances that resulted in

reversalsreversals

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Looking AheadLooking Ahead

There is nothing on the IASB’s There is nothing on the IASB’s current agenda that directly involves current agenda that directly involves potential changes to IAS 2 potential changes to IAS 2 InventoriesInventories

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End-of-Chapter PracticeEnd-of-Chapter Practice

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CONTACT:0322-3385752R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

Inventories: IAS 2. JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL...

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