Inventories: 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.
 Inventories
 Related standards
 IAS 2
 Current GAAP comparisons
 IFRS financial statement disclosures
 Looking ahead
 End-of-chapter practice

3
 Related Standards

 HB 3031 Inventories

4
 Related Standards

 FAS 151 Inventory costs—an amendment

of ARB 43
 ARB 43 Inventories

5
 Related Standards

 IAS 11 Construction contracts

 IAS 32 Financial instruments: presentation
 IAS 39 Financial instruments: recognition
and measurement
 IAS 41 Agriculture

6
 IAS 2 - Overview

 Objective and scope

 Measurement
 Expense recognition
 Disclosure

7
 IAS 2 - Objective and Scope
 Standards for what costs are recognized as
inventory costs and when these costs are
transferred to the income statement as
expense
 IAS 2 excludes construction work-in-
progress, inventories of financial
instruments, and biological inventory assets
related to agricultural activity and
agricultural products at the point of harvest

8
 IAS 2 - Objective and Scope
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

9
 IAS 2 - Measurement
 Inventories are measured at the lower of
cost and net realizable value (LC and NRV)
 Need to know:
- what costs are included
- what cost formulas are permitted
- how net realizable value is determined

10
 IAS 2 - Measurement
 Costs included:

1. Purchase costs
2. Conversion costs
3. Other inventoriable costs

11
 IAS 2 - Measurement
 Purchase costs

- purchase price and all costs directly

attributable to their acquisition such as
non-refundable taxes, transportation and
handling, reduced by volume discounts
and rebates

12
 IAS 2 - Measurement
 Conversion costs

- direct labour, indirect variable and fixed

production overhead costs
- variable production overhead: allocate to
inventory based on actual usage
- fixed production overhead: allocate to
production based on normal operating capacity
(except when abnormally high production)
13
 IAS 2 - Measurement
 Joint products

- Allocate between products on a rational

basis such as relative sales value of
products when they become separable
- If minor in value, do not allocate: measure
by-product at net realizable value and
deduct this amount from main product
costs
14
 IAS 2 - Measurement
 Other inventoriable costs
- limited to costs to bring the inventories to their
present location and condition
- example: amortization of capitalized
development costs related to inventory
- borrowing costs included if for a qualifying
inventory item (if measured at FV or produced in
large volumes on a repetitive basis, borrowing
costs may, but are not required to be capitalized)

15
 IAS 2 - Measurement
Do not add to inventory cost:
 Costs of abnormal waste

 Storage or warehousing costs unless

necessary for next stage of production
 Administrative overheads not associated
with production
 Selling costs

 Financing charges above purchase price

for normal credit terms
16
 IAS 2 - Measurement
 Cost formulas permitted should:
- Assign recent costs to ending inventory
- Correspond closely with the actual
physical flow of the goods and services

- Three permitted: Specific identification,

First-in, first-out, and weighted average

17
 IAS 2 - Measurement
Specific identification:
 For inventory items that are not ordinarily

interchangeable
 For goods and services produced and

segregated for specific projects

18
 IAS 2 - Measurement
FIFO and weighted average:
 FIFO – cost of latest purchases ends up in

cost of ending inventory, cost of earliest

purchases are in cost of goods sold
 Weighted average – weighted average

cost of all goods available for sale ends up

in both ending inventory and cost of
goods sold

19
 IAS 2 - Measurement
KPMG : The Application of IFRS: Choices
in Practice – International Financial
Reporting Standards, December
2006
Results indicate that the usage of the FIFO and
weighted average methods are fairly evenly split
by companies reporting under IFRS

20
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.
 IAS 2 - Measurement
 Inventories reported at the LC and NRV
 Why? So not reported at more than the
future cash flows into the company from
their sale
 NRV = the estimated selling price in the
ordinary course of business less the
estimated costs of completion and the
estimated costs to make the sale

22
 IAS 2 - Measurement
LC and NRV example:
 Cost Rs 80
 Selling price Rs 84
 Cost to complete Rs 5
 Cost to sell 10% of SP
NRV: Rs84 - Rs5 - Rs8.40 = Rs70.60
LC and NRV = Rs70.60

23
 IAS 2 - Measurement
 Write-downs are recognized in profit or
loss.
 Subsequent write-ups permitted to
maximum of prior write-downs if:
- changed economic circumstances and
NRV has increased, prior situation no
longer exists
 Reversals also taken to profit or loss

24
 IAS 2 – Expense Recognition
 Carrying amount of inventory sold is
expense in same period as the related
revenue
 Inventory adjustments (losses, write-
downs to lower of cost and NRV, write-
down reversals, etc.) are recognized as an
adjustment to the expense recognized in
the period

25
 IAS 2 - Disclosure
Disclosures needed for:
 Accounting policies applied

 Inventory remaining on statement of

financial position
 Inventory costs recognized in profit or loss

26
 IAS 2 - Disclosure
Balance-sheet related disclosures:
 Carrying amount in each category of
inventory (materials, WIP, finished goods,
production supplies, merchandise) and in
total
 Carrying amount of any inventory
measured at fair value less costs to sell
 Carrying amount of inventory pledged as
collateral for liabilities
27
 IAS 2 - Disclosure
Income statement-related disclosures:
 Amount of inventory recognized as an

expense (usually cost of sales/cost of

goods sold)
 Amount of write-downs to NRV or other

losses
 Amount of any write-down reversals

 Circumstances that resulted in reversals

28
 Looking Ahead

 There is nothing on the IASB’s current

agenda that directly involves potential
changes to IAS 2 Inventories

29
 End-of-Chapter Practice

30
 End-of-Chapter Practice

31
 End-of-Chapter Practice

32
 End-of-Chapter Practice

33
 End-of-Chapter Practice

34
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.