PAS 2: INVENTORIES

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.
Classification of inventories
Merchandising business
a. Merchandise inventory or Inventory: goods purchased by a trading company for resale in
the enterprise’s ordinary course of business
Manufacturing business:
a. Raw materials inventory: tangible goods purchased for direct use in the manufacture of
goods for sale
b. Work in process inventory – manufactured items requiring further processing
c. Finished goods inventory - manufactured goods completed and ready for sale
d. Manufacturing supplies inventory – items purchased for indirect use in the manufacture of
goods for resale
Service provider business
a. Work in process inventory: the cost of the service
Measurement
Inventories shall be measured at the lower of cost and net realizable value.
Initial measurement: inventories are initially measured at historical cost.
Cost of Inventories: The cost of inventories shall comprise all costs of purchase, costs of conversion
and other costs incurred in bringing the inventories to their present location and condition.
Cost of Purchase: Includes all cost in the initial acquisition of an inventory.
Cost of conversion: cost directly related to units of products, as well as systematic allocation of fix
variable overheads.
Other cost: Capitalized only when incurred in bringing the inventories to their present location and
condition.
PAS 41 Agriculture Inventories: biological assets are measured on initial recognition at their fair value
less cost to sell at the point of harvest.
Two factors in measuring Inventories

● Techniques used
● Cost formula applied
Techniques for the Measurement of Cost
Standard Cost: take into account normal levels of materials and supplies, labor, efficiency and
capacity utilization.
Retail Method: The retail method is used in retail industry to measure relatively homogenous
inventories with similar margins.
Cost Formulas: Once chosen, the cost formula should be applied consistently to all inventories that
have a similar nature and use.
Specific Identification: The cost of inventories of items that are not ordinarily interchangeable, and
goods or services produced and segregated for specific projects shall be assigned by using specific
identification of their individual costs.
FIFO: assumes that the items of inventory that were purchased or produced first are sold first.
Weighted Average: the cost of each item is determined from the weighted average of the cost of
similar items at the beginning of a period and the cost of similar items purchased or produced during
the period.
Net Realizable Value: he estimated selling price in the ordinary course of business less the estimated
costs of completion and the estimated costs necessary to make the sale.

● an inventory should be measured at the lower of Cost and Net Realizable Value.
● An asset should not be carried at an amount more than its recoverable amount. NRV
estimates are made at the end of each period to determine whether a write-down for any
item of the inventory should be recognized or reversed.
Assessing NRV
Unrecoverable: If circumstances happen, a write-down of the inventory to NRV is recognized as an
expense.
Reversals: If the circumstances no longer exist or change into positive, the previous write-down is
reversed.
Sold above and below cost: if NRV is below cost, it may not be necessary to write them down.

● Estimates of net realizable value are based on the most reliable evidence available at the
time the estimates are made, of the amount the inventories are expected to realize.
Recognition of an Expense

● When inventories are sold, the carrying amount of those inventories shall be recognized as
an expense in the period in which the related revenue is recognized.
● The amount of any write‑down of inventories to net realizable value and all losses of
inventories shall be recognized as an expense in the period the write‑down or loss occurs
Disclosures
The financial statements shall disclose:
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 carrying amount of inventories carried at fair value less costs to sell;
d. the amount of inventories recognized as an expense during the period;
e. the amount of any write‑down of inventories recognized as an expense in the period;
f. the amount of any reversal of any write‑down that is recognized as a reduction in the amount
of inventories recognized as expense in the period;
g. the circumstances or events that led to the reversal of a write‑down of inventories;
h. the carrying amount of inventories pledged as security for liabilities