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Ias 2 - Inventories

1) IAS 2 provides guidance on determining the cost of inventories and subsequent recognition as an expense, including write-downs to net realizable value. 2) Inventories include assets held for sale, in production for sale, or in the form of materials used in production. 3) Inventories are measured at the lower of cost or net realizable value, with cost determined using various acceptable methods including first-in-first-out or weighted average.

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799 views

Ias 2 - Inventories

1) IAS 2 provides guidance on determining the cost of inventories and subsequent recognition as an expense, including write-downs to net realizable value. 2) Inventories include assets held for sale, in production for sale, or in the form of materials used in production. 3) Inventories are measured at the lower of cost or net realizable value, with cost determined using various acceptable methods including first-in-first-out or weighted average.

Uploaded by

mulualem
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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IAS 2 - INVENTORIES

OBJECTIVE
The objective of this Standard is to prescribe: the accounting treatment
for inventories

 the amount of cost to be recognized as an asset


 Determination of the cost and subsequent recognition of expense
(Including write-down of inventory to its net realizable value)
 cost formulas that are to be used in assigning costs to inventories.

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SCOPE:
IAS 2 applies to all inventories, expect
a)Work in progress arising under construction contracts,
including directly related service contracts (see IAS 11
Construction Contracts)
b)Financial instruments (see IAS 39 Financial Instruments)
c)Biological assets related to agricultural activity and
agricultural produce at the point of harvest (see IAS 41
Agriculture)

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 Inventories, An asset
a)Held for sale in the ordinary course of business;
b)In the process of production for such sale;
c)In the form of materials or supplies to be consumed in
the production process or in the rendering of services.
 Net Realizable Value / Fair Value
Net Realizable Value: is the estimated selling price in the ordinary course of
business less the estimated cost of completion and the estimated costs
necessary to make the sale.
Fair Value: is the amount for which an asset could be exchanged, or a
liability settled, between knowledgeable, willing parties in an arm’s length
transaction.

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 Cost and Valuation

• Inventories shall be measured at the lower of cost and net


realizable value
• The cost of inventories shall comprise all costs of purchase,
cost of conversion and other costs incurred in bringing the
inventories to their present location and condition.

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 Cost of Purchase

 The cost of purchase of inventories comprise the purchase


price, import duties and other taxes, transport, handling
and other costs directly attributable to the acquisition of
finished goods, materials and services.
 Trade discounts, refunds and other similar items are
deducted in determining the cost of purchase.

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 Costs of Conversion

 The costs of conversion of inventories include costs directly related


to the units of production, such as direct labor. They also include a
systematic allocation of fixed and variable production overheads
that are incurred in converting materials into finished goods.

 The allocation of fixed production overheads to the costs of


conversion is based on the normal capacity of the production
facilities. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of low production or
idle plant.
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 Costs items excluded from cost of inventories
a) Abnormal amounts of wasted materials, labor or other
production costs
b) Storage costs, unless those costs are necessary in the production
process before a further production stage
c) Administrative overheads
d) Selling costs

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 Cost Formulas
 Goods or services produced and segregated for specific projects
shall be assigned by using specific identification of their
individual costs.
 The First-in, First out (FIFO)
 Weighted average cost formula
 The Standard does not permit the use of the last-in, first-out
(LIFO) formula to measure the cost of inventories.

 An entity shall use the same cost formula for all inventories
having a similar nature and use to the entity.
For inventories with a different nature or use, different cost
formulas may be justified. Mulualem Gizaw
Net Realizable Value
Estimated Selling Price X
Discounts (X)
Estimated cost of completion (X)
Selling Costs (X)
---
Net Realizable Value X

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Disclosure
• The accounting policies adopted in measuring inventories, including the
cost of formula used,
• The total carrying amount of inventories and the carrying amount in
classifications appropriate to the entity,
• the carrying amount of inventories carried at fair value less costs to sell,
• the amount of inventories recognized as an expense during the period,
• the amount of any write-down of inventories recognized as an expense in
the period,
• the amount of any reversal of any write-down that is recognized as a
reduction, in the amount of inventories recognized as expense,
• the circumstances or events that led to the reversal of a write-down of
inventories,
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Recognition as 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.
• The amount of any reversal of any write-down of inventories, arising from
an increase in net realizable value, shall be recognized as a reduction in the
amount of inventories recognized as an expense in the period in which the
reversal occurs.

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