IND AS-2 (valuation of Inventories) , School of Management Studies , CUSAT , Kochi

1. Ind AS-2
(Valuation Of
Inventories)
-Akhilesh Krishnan
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2. Scope
Inventories are assets :
 held for sale in ordinary course of business
 in the process of production for such sale, or
 in the form of materials or supplies to be
consumed in the production process or in the
rendering of services.
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3. Does not apply :
• work in progress in the construction
business, including directly related service
contracts.
 work in progress of service business
(consulting, banking etc..)
• shares, debentures and other financial
instruments held as stock in trade.
 Inventories like livestock, agricultural and
forest products, mineral oils etc..
These inventories are valued at net
realizable value.
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4.  Net Realisable Value (NRV):
 “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”
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5. Valuation of Inventories
 (A)Determine the cost of inventories.
 (B)Determine the net realizable value
of inventories.
 On Comparison between the cost and
net realizable value, the lower of the
two is considered as the value of
inventory. A comparison can be made
the item by item or by the group of
items.
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6. Cost of Inventories
 The cost of inventories includes the
following
 i) Purchase cost
 ii) Conversion cost
 iii) Other costs which are incurred in
bringing the inventories to their
present location and condition.
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7. (i) Cost of Purchase
 While determining the purchase cost, the
following should be considered:
 i) Purchase cost includes duties and
taxes (except those which are
subsequently recoverable from the
taxing authorities)
 ii) Trade discounts, rebates, duty
drawbacks and other similar items are
deducted in determining the costs of
purchase.
 iii) Freight inwards
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8. (ii) Cost of Conversion
 Cost of conversion includes all cost incurred
during the production process to complete
the raw materials into finished goods.
 Cost of conversion also includes a systematic
allocation of fixed and variable overheads
incurred by the enterprise during the
production process.
 Following are the categories of conversion
cost:
 I. Direct Cost
 II. Fixed Overhead Cost
 III. Variable Overhead Cost
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9. (iii) Other Cost
 All the other cost which are incurred in
bringing the inventories to the current location
and condition.
eg: design cost which is incurred for the
specific customer order.
 If there are by-products during the production
of main products, their cost has to be
separately identified. If they are not
separately identifiable, then allocation can be
made on the relative sale value of the main
product and the by-product.
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10. Some of the cost which should not be
included are:
 A). Cost of any abnormal waste
materials cost.
 B). Selling and distribution cost unless
those costs are necessary for the
production process.
 C). A normal loss which occurs during
the production process is apportioned
over the remaining no of units and
abnormal loss is treated as an expense.
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11. Methods of Inventory Valuation
 The cost of inventories of items which can be
segregated for specific projects should be
assigned by specific identification of their
individual costs (Specific identification
method).
 All other items cost should be assigned by
using the first-in, first-out (FIFO), or weighted
average cost (WAC) 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.
 However, when it is difficult to calculate the
cost using above methods, Standard cost
and Retail cost can be used if the results
approximate the actual cost. 11

12.  The FIFO formula assumes that the items of
inventory that were purchased or produced first
are sold first, and consequently the items
remaining in inventory at the end of the period
are those most recently purchased or produced.
 Under the weighted average cost formula, 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.
 When using the weighted average method,
divide the cost of goods available for sale by
the number of units available for sale, which
yields the weighted-average cost per unit.The
average may be calculated on a periodic basis,
or as each additional shipment is received,
depending upon the circumstances of the entity.
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13. Accounting Disclosure
 The following should be disclosed in the financial
statements:
 Accounting policy adopted in inventory
measurement
 Cost formula used.
 Classification of the of inventory such as finished
goods, raw material & WIP and stores and
spares etc.
 Carrying amount of inventories carried at fair
value less sale cost.
 Amount of inventories recognized as expense
during the period.
 Amount of any write-down of inventories 13

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