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Inventories – ias 2

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IAS 2

IAS 2

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  • 1. INVENTORIES – IAS 2 N R GOVINDARAJAN FCA,AICWA,CISA,DISA(ICAI) CHARTERED ACCOUNTANT
  • 2. Introduction
    • International Accounting Standard 2 Inventories (IAS 2) replaces IAS 2 Inventories (revised in 1993) and
    • It should be applied for annual periods beginning on or after 1 January 2005.
    • It was revised in 2003 with the main objective of reducing the alternatives for the measurement of inventories.
  • 3. Scope and objectives
    • Prescribe the accounting treatment for inventories.
    • Provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value.
    • Gives guidance on the cost formulas that are used to assign costs
  • 4. Total Exclusions
    • This Standard applies to all inventories, except:
    • (a) WIP arising under construction contracts, including directly related service contracts (see IAS 11 Construction Contracts );
    • (b) Financial instruments (see IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition and Measurement ); and
    • (c) Biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41 Agriculture ).
  • 5. Partial Exclusions
    • This Standard does not apply to the measurement of inventories held by:
    • Producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value in accordance with well-established practices in those industries .
    • When such inventories are measured at net realisable value, changes in that value are recognised in profit or loss in the period of the change.
    • (b) commodity broker-traders who measure their inventories at fair value less costs to sell.
    • When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognised in profit or loss in the period of the change
  • 6. Inventories
    • 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
  • 7. NRV AND FV
    • 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.
    • 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
  • 8. Measurement
    • Inventories shall be measured at the lower of cost and net realisable value
    • Cost means:
    • All costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition
  • 9. Cost of purchase
    • It includes:
    • 1. Purchase price, import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), and
    • 2. Transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services.
    • Deductions :
    • Trade discounts,
    • Rebates and other similar items
  • 10. Cost of conversion
    • It includes:
    • Costs directly related to the units of production, such as direct labour.
    • It also include a systematic allocation of fixed and variable production overheads.
    • The allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities
    • Unallocated overheads are recognised as an expense in the period in which they are incurred
  • 11. Other costs
    • Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition
    • Eg: Non-production overheads or the costs of designing products for specific customers in the cost of inventories
  • 12. Excluded Costs
    • Abnormal amounts of wasted materials, labour or other production costs;
    • Storage costs, unless those costs are necessary in the production process before a further production stage;
    • Administrative overheads that do not contribute to bringing inventories to their present location and condition; and
    • Selling costs.
  • 13. Interest cost
    • To a limited extent borrowing costs are included in the cost of inventories under IAS 23
    • In case of DP purchase of inventories:
    • Difference between the purchase price for normal credit terms and the amount paid, is recognised as interest expense over the period of the financing
  • 14. Service Provider’s Inventory
    • Measured at cost of Production
    • Which consists of direct costs and allocated overheads
    • Excludes Selling and Admin Expenses
    • Profit Margins and non attributable overheads are excluded
  • 15. Cost measurement - Techniques
    • For the measurement of the cost of inventories, the standard cost method or the retail method, may be used for convenience if the results approximate cost.
    • The retail method is used in the retail industry for measuring inventories of large numbers of rapidly changing items with similar margins for which it is impracticable to use other costing methods.
  • 16. Cost formulae
    • SPECIFIC IDENTIFICATION OF COST
    • The cost of inventories of items that :
    • Are not ordinarily interchangeable
    • Goods or services produced and segregated for specific projects
    • Shall be assigned by using specific identification of their individual costs
  • 17. Cost formulae
    • FIFO OR WEIGHTED AVERAGE
    • The cost of inventories, in other cases shall be assigned by using the first-in, first-out (FIFO) or weighted average cost formula.
    • An entity shall use the same cost formula for all inventories having a similar nature and use to the entity but if not in similar nature it may use different cost formulae.
    • .
  • 18. Net realisable value
    • The practice of writing inventories down 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.
    • Inventories are usually written down to net realisable value item by item
    • Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made, of the amount the inventories are expected to realise.
  • 19. Net realisable value
    • The net realisable value of the quantity of inventory held to satisfy firm sales or service contracts is based on the contract price.
    • If the sales contracts are for less than the inventory quantities held, the net realisable value of the excess is based on general selling prices.
  • 20. Reversal of NRV
    • When the circumstances that previously caused inventories to be written down below cost no longer exist or
    • When there is clear evidence of an increase in net realisable value because of changed economic circumstances, the amount of the write-down is reversed
    • The reversal is limited to the amount of the original write-down so that the new carrying amount is the lower of the cost and the revised net realisable value.
    • Eg:when an item of inventory that is carried at net realisable value, because its selling price has declined, is still on hand in a subsequent period and its selling price has increased it requires a reversal
  • 21. Recognition of expense
    • When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised.
    • The amount of any write-down of inventories to net realisable value and all losses of inventories shall be recognised as an expense in the period the write-down or loss occurs
  • 22. Recognition of expense
    • The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, shall be recognised:
    • as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.
  • 23. Disclosures
    • Accounting policies adopted in measuring inventories, including the cost formula used;
    • Total carrying amount of inventories and the carrying amount inclassifications appropriate to the entity;
    • Carrying amount of inventories carried at fair value less costs to sell;
    • Amount of inventories recognised as an expense during the period;
    • Amount of any write-down of inventories
  • 24. Disclosures
    • the amount of any write-down of inventories recognised as an expense in the period in accordance with paragraph 34;
    • Amount of any reversal of any write-down that is recognised as areduction in the amount of inventories recognised as expense in the period in accordance with paragraph 34;
    • The circumstances or events that led to the reversal of a write-down of inventories in accordance with paragraph 34; and
    • Carrying amount of inventories pledged as security for liabilities
  • 25. IND AS 2 VS IAS 2
    • Paragraph 38 of IAS 2 dealing with recognition of inventories as an expense based on function-wise classification, has been deleted
    • Keeping in view the fact that option provided in IAS 1 to present an analysis of expenses recognised in profit or loss using a classification based on th eir function within the equity has been removed and Ind AS 1 requires only nature -wise classification of expenses.
    • However, in order to maintain consistency with paragraph numbers of IAS 2, the paragraph number is retained in Ind AS 2.
  • 26. THANK YOU [email_address]

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