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Accounting Standard (As) 2

This accounting standard provides guidance on determining the valuation of inventories. It discusses determining the cost of inventories, including acquisition costs and conversion costs, and writing down the value of inventories to net realizable value if the cost is not recoverable. Acceptable costing methods for valuing inventories include first-in-first-out, weighted average, and standard cost methods. Disclosures on inventory accounting policies and total carrying amounts are also required.

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55 views

Accounting Standard (As) 2

This accounting standard provides guidance on determining the valuation of inventories. It discusses determining the cost of inventories, including acquisition costs and conversion costs, and writing down the value of inventories to net realizable value if the cost is not recoverable. Acceptable costing methods for valuing inventories include first-in-first-out, weighted average, and standard cost methods. Disclosures on inventory accounting policies and total carrying amounts are also required.

Uploaded by

vvs176975
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Accounting Standard (AS) 2

(revised 1999)
Valuation of Inventories
Objective

 This Statement deals with the determination


of such value,
 including the ascertainment of cost of
inventories and
 Any write-down thereof to net realisable
value.
Scope

This Statement should be applied in accounting for


inventories other than:

(a) work in progress arising under construction


contracts, including directly related service
contracts (see Accounting Standard (AS) 7,
Accounting for Construction Contracts3);

(b) work in progress arising in the ordinary course of


business of service providers;
Scope
(c) shares, debentures and other financial instruments held as
stock-in-trade; and

(d) producers’ inventories of


 livestock,
 agricultural and forest products, and
 mineral oils,
 ores and gases

to the extent that they are measured at net realisable value in


accordance with well established practices in those
industries.
Definitions

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.
Definitions
Net realisable value is the
estimated selling price in the ordinary course of
business
less the estimated costs of completion and the
estimated costs necessary to make the sale.
Measurement of Inventories

Inventories should be valued at the lower of


 cost and

 net realisable value.


Cost of Inventories

The cost of inventories should comprise all


 costs of purchase,

 costs of conversion and

 other costs incurred in bringing the


inventories to their present location and
condition.
Cost of Inventories

Costs of Purchase
The costs of purchase consist of the
 purchase price including
 Duties and taxes (other than those subsequently recoverable
by the enterprise from the taxing authorities),
 freight inwards and
 other expenditure directly attributable to the acquisition.
 Trade discounts, rebates, duty drawbacks a other similar
items are deducted in determining the costs of purchase.
Cost of Inventories

Costs of Conversion
The costs of conversion of inventories include

 costs directly related to the units of production, such


as direct labour.

 They also include a systematic allocation of fixed


and variable production overheads that are incurred
in converting materials into finished goods.
Cost of Inventories

Fixed production overheads are those


 indirect costs of production that remain
relatively constant regardless of the volume of
production,
 such as depreciation and maintenance of
factory buildings and the cost of factory
management and administration.
Cost of Inventories

Variable production overheads are those


 indirect costs of production that vary directly,
or nearly directly, with the volume of
production,
 such as indirect materials and indirect labour.
Cost of Inventories

Other Costs
 Other costs are incurred in bringing the inventories to their
present location and condition.
 For example, it may be appropriate to include overheads
other than production overheads or the costs of designing
products for specific customers in the cost of inventories.

 Interest and other borrowing costs are usually considered as


not relating to bringing the inventories to their present
location and condition, usually not included in the cost of
inventories.
Exclusions from the Cost of Inventories

In determining the cost of inventories it is appropriate to exclude


certain costs and recognise them as expenses in the period in
which they are incurred. Examples of such costs are:
 abnormal amounts of wasted materials, labour, or other
production costs;
 storage costs, unless those costs are necessary in the
production process prior to a further production stage;
 administrative overheads that do not contribute to bringing
the inventories to their present location and condition; and
 selling and distribution costs.
Cost Formulas

Paragraph 14
 The cost of inventories of items that are not
ordinarily interchangeable and
 goods or services produced and segregated
for specific projects should be
 assigned by specific identification of their
individual costs.
Cost Formulas

The cost of inventories, other than those dealt with in


paragraph 14, should be assigned by using
 the first-in, first-out (FIFO), or

 weighted average cost formula.

 The formula used should reflect the fairest possible


approximation to the cost incurred in bringing the
items of inventory to their present location and
condition.
Techniques for the Measurement of Cost

Techniques for the measurement of the cost of


inventories, such as the
 standard cost method or

 the retail method,

may be used for convenience if the results


approximate the actual cost.
Techniques for the Measurement of Cost

Standard costs take into account


 normal levels of consumption of materials and

 supplies, labour, efficiency and capacity


utilisation.

They are regularly reviewed and, if necessary,


revised in the light of current conditions.
Techniques for the Measurement of Cost

The retail method is often used in the retail trade for measuring
inventories of large numbers of rapidly changing items that
have similar margins and for which it is impracticable to use
other costing methods.

 The cost of the inventory is determined by reducing from the


sales value of the inventory the appropriate percentage gross
margin.
 The percentage used takes into consideration inventory which
has been marked down to below its original selling price.
 An average percentage for each retail department is often
used.
Net Realisable Value

The cost of inventories may not be recoverable if


those inventories are
 damaged,

 if they have become wholly or partially


obsolete, or
 if their selling prices have declined.
Net Realisable Value

 The practice of writing down inventories


below cost to net realisable value is consistent
with the view that assets should not be
 carried in excess of amounts expected to be
realised from their sale or use.
Net Realisable Value

 Inventories are usually written down to net


realisable value on an item by- item basis.
 In some circumstances, however, it may be
appropriate to group similar or related items.
 An assessment is made of net realisable value
as at each balance sheet date.
Net Realisable Value

 Estimates of net realisable value are based on


 The most reliable evidence available at the
time the estimates are made as to the amount
the inventories are expected to realise.
 These estimates take into consideration
fluctuations of price or cost directly relating
to events occurring after the balance sheet
date to the extent that such events confirm the
conditions existing at the balance sheet date.
Disclosure

The financial statements should disclose:

(a) the accounting policies adopted in measuring


inventories, including the cost formula used; and

(b) the total carrying amount of inventories and its


classification appropriate to the enterprise.

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