Invento

ry
I AS 2
C HAPTE R
10
 Definition and
IAS 2 recognition Cost formulas

Conversion
Measurement
Joint and by products

Net realisable value

Disclosure
 Definition
IAS 2 para 6: Inventories are assets
◦Held for sale in the ordinary course of business
◦In the process of production for such sale
◦In the form of materials or supplies to be consumed in the production process or in the rendering of services
Measurem
ent
Lower of cost and net realisable value (IAS 2 para 9)
Cost: all costs of purchase, costs of conversion and other costs incurred in bringing the
inventories to their present location and condition (IAS 2 para 10)
IAS 2 para 11: cost of purchase comprises
◦Purchase price
◦Import duties and other taxes (excl those recoverable)
◦Transport, handling
◦Any cost directly attributable to the acquisition of finished goods, materials and services
◦Trade discounts, rebates and other similar items are deducted
Cost
formulas
FIFO
◦Items produced first are sold first (IAS 2 para 27)

Weighted average
◦Weighted average of cost of similar items at the beginning of the period and the cost of similar items
purchased/produced during the period (IAS 2 para 27)

Specific identification (IAS 2 para 23)

◦Specific costs are attributed to identified items of inventory

Same cost formula must be applied for all inventory of similar nature and use to the entity

Illustrative example 10.2 pg 5

Cost of
conversion
IAS 2 para 12 and 13
Costs directly related to the units of production
Systematic allocation of fixed and variable overheads
Fixed overhead allocation based on normal capacity
◦Unallocated overheads recognised as an expense
◦High production – amount of fixed overhead per unit is decreased so that inventory is not measured
above cost

Illustrative example 10.3 pg 6-7

Illustrative example 10.4 pg 8
Examples of costs excluded from cost of inventory (IAS 2 para 16):
◦Abnormal amounts of wasted materials, labour / other production costs
◦Storage costs unless necessary in the production process before a further production stage
◦Administrative overheads not contributing to bringing inventory to location and condition
◦Selling costs
Joint and by
product
Allocate costs from one production line to two or more products produced within that process
IAS2 para 14 : When costs of each product are not separately identifiable
◦allocate costs on a rational and consistent basis (eg. relative sales value)
◦by-products often measured at their NRV and deducted from the cost of the main product

Illustrative example 10.5 pg 9-10

 Net
Materials and other supplies held for use in production of inventory are not written down below cost if the finished
Realisable
products in which they will be incorporated are expected to be sold at or above cost
IAS 2 para 34
Value
◦When sold, recognise as an expense in the period in which the revenue is recognised
◦Write-downs/losses recognised as an expense in the period the write-down/loss occurs

Illustrative example 10.6 pg 11-12

Illustrative example 10.7 pg 12-13
 Disclosure
IAS 2 para 36
◦Accounting policies adopted in measuring inventory including cost formula
◦Carrying amount per classification
◦Carrying amount of inventory carried at fair value less costs to sell (NRV)
◦Amount of inventory recognised as an expense during the period
◦Amount of inventory write-downs in the period
◦Amount of reversal of write-downs
◦Circumstances/events leading to the reversal of write-down
◦Carrying amount of inventories pledged as security
INVESTMENT
PROPERTY

IAS 40
CHAPTER 9
WEEK 4
INTRODUCTI
ON
 Classificat
ion and
Recognitio
n

Initial
Disclos Measurem
ure
IA ent
Subsequent
S • Cost vs Fair
Value

4
• Deferred tax

Dispos
0 Change
in
als classificat
ion
 DEFINITION
• IAS 40 PARA 5 – INVESTMENT PROPERTY (LAND OR A BUILDING – OR PART
OF A BUILDING – OR BOTH) HELD (BY THE OWNER OR BY THE LESSEE AS A
RIGHT-OF-USE ASSET) TO EARN RENTALS OR FOR CAPITAL APPRECIATION
OR BOTH RATHER THAN FOR
• USE IN THE PRODUCTION OR SUPPLY OF GOODS OR SERVICES OR FOR
ADMINISTRATIVE PURPOSES (CLASSIFY UNDER IAS 16 AS PPE – OWNER-
OCCUPIED) OR
• SALE IN THE ORDINARY COURSE OF BUSINESS (CLASSIFY UNDER IAS 2 AS
INVENTORY)

• IAS 40 PARA 8 GIVES EXAMPLES OF INVESTMENT PROPERTY (CH9:PG2)

• IAS 40 PARA 10 – JOINT-USE PROPERTY
• IF PORTIONS CAN BE SOLD OR LEASED OUT SEPARATELY UNDER A FINANCE
LEASE – ACCOUNT FOR PORTIONS SEPARATELY
• IF PORTIONS CANNOT BE SOLD OR LEASED OUT SEPARATELY UNDER A FINANCE
LEASE
• INVESTMENT PROPERTY IF INSIGNIFICANT PORTION HELD FOR USE IN THE
PRODUCTION OR SUPPLY OF GOODS OR SERVICES OR FOR ADMINISTRATIVE
PURPOSES
• PPE IF SIGNIFICANT PORTION HELD FOR USE IN THE PRODUCTION OR SUPPLY OF GOODS
OR SERVICES OR FOR ADMINISTRATIVE PURPOSES

• IAS PARA 11 AND 12: ANCILLARY SERVICES

• SERVICES ARE INSIGNIFICANT – INVESTMENT PROPERTY
• SERVICES ARE SIGNIFICANT – PPE (OWNER-OCCUPIED)
 RECOGNITIO
N
• IAS 40 PARA 16: INVESTMENT PROPERTY SHALL BE RECOGNISED AS
AN ASSET WHEN
• IT IS PROBABLY THAT THE FUTURE ECONOMIC BENEFITS THAT ARE
ASSOCIATED WITH THE INVESTMENT PROPERTY WILL FLOW TO THE
ENTITY AND
• THE COST OF THE INVESTMENT PROPERTY CAN BE MEASURED RELIABLY

• APPLY THIS FOR SUBSEQUENT EXPENDITURE TO DETERMINE IF

CAPITALISE OR EXPENSE
 PROPERTY INTEREST UNDER A
LEASE
• IF AN ENTITY ENTERS INTO A LEASE FOR THE PURPOSES OF SUB-LETTING, THEN IT IS ACCOUNTED FOR AS IP

• ENTITY IS A LESSOR AND ACCOUNTS FOR LEASE RECEIPTS USING IFRS 16

• ILLUSTRATIVE EXAMPLE 9.5 PG 17-18

 INITIAL MEASUREMENT
• IAS 40 PARA 20: INITIALLY MEASURED AT COST, INCLUDING TRANSACTION COST
• IAS 40 PARA 21: COST COMPRISES
• PURCHASE PRICE
• DIRECTLY ATTRIBUTABLE EXPENDITURE (EG. PROFESSIONAL FEES, TRANSFER TAXES)

• IAS 40 PARA 22: DO NOT INCLUDE

• START-UP COSTS (UNLESS NECESSARY TO BRING PROPERTY TO CONDITION NECESSARY FOR IT TO BE
CAPABLE OF OPERATING IN THE MANNER INTENDED BY MANAGEMENT)
• OPERATING LOSSES
• ABNORMAL AMOUNTS OF WASTED MATERIAL, LABOUR OR OTHER RESOURCES INCURRED IN
CONSTRUCTING OR DEVELOPING THE PROPERTY
• IAS 40 PARA 23: DEFERRED PAYMENT – COST IS CASH PRICE EQUIVALENT, DIFFERENCE BETWEEN TOTAL PAYMENT
AND CASH PRICE EQUIVALENT = INTEREST EXPENSE
 SUBSEQUENT
MEASUREMENT
• FAIR VALUE MODEL (PARA 33-55)
• GAIN/LOSS RECOGNISED IN P/L (PARA 35)
• CANNOT CHANGE FROM FV TO COST MODEL (PARA 55)
• AVOID DOUBLE COUNTING ITEMS THAT ARE ALREADY RECOGNISED AS SEPARATE
ASSETS/LIABILITIES (PARA 50)
• COST MODEL (PARA 56)
• IFRS 5 IF MEETS CRITERIA TO BE CLASSIFIED AS HELD FOR SALE
• IFRS 16 IF IT IS HELD BY A LESSEE AS A RIGHT-OF-USE ASSET
• IAS 16 FOR ALL OTHER CASES
 SUBSEQUENT
EXPENDITURE
• WHEN TO CAPITALISE AND WHEN TO EXPENSE?
• IAS 40 PARA 17: SUBSEQUENT EXPENDITURE ON INVESTMENT
PROPERTY SHALL BE RECOGNISED AS AN ASSET WHEN
• IT IS PROBABLY THAT THE FUTURE ECONOMIC BENEFITS THAT ARE
ASSOCIATED WITH THE INVESTMENT PROPERTY WILL FLOW TO THE
ENTITY AND
• THE COST OF THE INVESTMENT PROPERTY CAN BE MEASURED RELIABLY
 DEFERRED TAX
• NB. DEFERRED TAX ON INVESTMENT PROPERTY IS ON THE ASSUMPTION THAT THEY WILL BE SOLD (AS THEY ARE
HELD FOR RENTAL AND CAPITAL APPRECIATION)
• CAN BE REBUTTED IF BUSINESS MODEL IS TO REALISE THE RENTALS OVER TIME AND
ITS DEPRECIABLE
• CANNOT BE REBUTTED FOR NON-DEPRECIABLE ASSET
• CGT WILL NEED TO BE TAKEN INTO ACCOUNT WHERE THE FV IS GREATER THAN THE BASE COST
• SEE ALSO INVESTMENT PROPERTY VIDEO UNDER DEFERRED TAX SECTION
 CHANGE IN
CLASSIFICATION
• TRANSFER WHEN THERE IS A CHANGE IN USE
• WHEN COST MODEL IS USED, NO CHANGE TO CARRYING
AMOUNT (PARA 59)
• WHEN FAIR VALUE MODEL IS USED
Transfer details Deemed cost/treatment
IP to PPE / ROU Asset / Inventory Fair value, thereafter
(para 60) apply
IAS16/IFRS16/IAS2
PPE to IP (para 61) Take CA to FV (treat as a
revaluation/devaluation), IP cost
will be FV
Inventory to IP (para 63) Diff between CA and FV taken to P/L
(like sale of inventory), IP cost will be
FV
 DISPOSAL
• IAS 40 PARA 66 - DERECOGNISE ON DISPOSAL OR WHEN PERMANENTLY WITHDRAWN FROM USE AND NO FUTURE
S
ECONOMIC BENEFITS ARE EXPECTED FROM THE DISPOSAL
• IAS 40 PARA 68: REPLACEMENT PART – DERECOGNISE CARRYING AMOUNT OLD PART, RECOGNISE COST OF NEW
PART
• IAS 40 PARA 69: GAINS/LOSSES ON DISPOSAL (PROCEEDS – CA) RECOGNISED IN P/L
• IAS 40 PARA 72: COMPENSATION FROM 3RD PARTIES FOR IP IMPAIRED, LOST OR GIVEN UP SHOULD BE
RECOGNISED IN P/L WHEN IT BECOMES RECEIVABLE
• IAS 40 PARA 73: 4 ECONOMIC EVENTS MUST BE ACCOUNTED FOR SEPARATELY
• IMPAIRMENT
• DE-RECOGNITION/DISPOSAL
• COMPENSATION
• RESTORE THE COST OF ITEMS
 DISCLOSU
RE
• IAS 40 PARA 75
• FV MODEL / COST MODEL (ACCOUNTING POLICY)
• CRITERIA USED TO DISTINGUISH OWNER-OCCUPIED AND PROPERTY FOR SALE IN ORDINARY COURSE OF BUSINESS
(ACCOUNTING POLICY)
• EXTENT TO WHICH FV IS BASED ON A VALUATION BY AN INDEPENDENT VALUER HOLDING QUALIFICATION AND
RELEVANT EXPERIENCE TO VALUE (IP NOTE)
• IN P/L (PBT NOTE)
• RENTAL INCOME
• OPERATING EXPENSES ARISING FROM IP (EG. REPAIRS AND MAINTENANCE)
• THAT GENERATED INCOME IN THE PERIOD
• THAT DID NOT GENERATE INCOME IN THE PERIOD

• RESTRICTIONS ON REALISATION OF IP (IP NOTE)

• CONTRACTUAL OBLIGATIONS (PURCHASE, CONSTRUCT OR DEVELOP) (IP NOTE)
• IAS 40 PARA 76-78 (FAIR VALUE MODEL); 79 (COST MODEL)
• FAIR VALUE MODEL
• RECONCILIATION OF CA (IP NOTE)
• ADDITIONS – ACQUISITIONS VS SUBSEQUENT EXPENDITURE
• ADDITIONS – BUSINESS COMBINATION
• CLASSIFIED AS HELD FOR SALE
• GAIN/LOSS FROM FV ADJUSTMENT
• EXCHANGE DIFFERENCES (PRESENTATION CURRENCY)
• TRANSFERS TO/FROM INVENTORY/PPE
• RECON BETWEEN VALUATION AND ADJUSTED AMOUNT IN AFS IF
APPLICABLE (IP NOTE)
• COST MODEL
• DESCRIPTION OF IP (IP NOTE)
• EXPLANATION WHY FV CANNOT BE MEASURED RELIABLY (IP NOTE)
• RANGE OF ESTIMATES WITHIN WHICH FV IS LIKELY TO LIE (IP NOTE)
• ON DISPOSAL (IP NOTE)
• THAT IT WAS DISPOSED OF
• WHAT THE CA WAS AT TIME OF SALE
• GAIN/LOSS RECOGNISED
• DEPRECIATION METHOD (ACCOUNTING POLICY)
• UL / DEPRECIATION RATE USED (ACCOUNTING POLICY)
• CA AND ACCUMULATED DEPRECIATION AT BEGIN AND END (IP NOTE)
• RECONCILIATION OF CA (IP NOTE)
• ADDITIONS (ACQUISITIONS, SUBSEQUENT EXPENDITURE, BUSINESS
COMBINATIONS)
• HELD FOR SALE
• DEPRECIATION
• IMPAIRMENT LOSS / IMPAIRMENT LOSS REVERSED
• EXCHANGE DIFFERENCES ON TRANSLATION
• TRANSFERS TO/FROM INVENTORY AND PPE