Summary Of IAS 2

Inventory in IAS 2:

Definition Of inventory:

In a business raw material work- in-process, semi finished and finished goods available for sale is named as inventory.

Purpose of IAS 2:

IAS 2 describes how to deal with inventory. It gives direction for assigning cost to inventory by identifying expenses attached with inventory.

It tells about

When inventory is purchased, how it should be recorded

When inventory should be recorded as an expense

Scope:

The following 3 types of inventories are included in IAS 2

Ø  Finished goods

Ø  Work in process

Ø  Raw material

The following inventories are not included in IAS 2

Ø  Work in process arising under construction contracts

Ø  Financial instruments e.g. shares and bonds

Ø  Biological assets related to agricultural activity and agricultural produce at the point of harvest e.g. cattle and crops

Fundamental Principle of IAS 2:

Inventories are required to be stated at the lower of cost and net realizable value (NRV).

Measurement of Inventories:

Cost should include all:

Ø  costs of purchase (including taxes, transport, and handling)

Ø  costs of conversion i.e. labour and overhead

Ø  Other costs incurred in bringing the inventories to their present location and condition

Note:

In some circumstances borrowing cost is also included in cost of inventory

Ø  Abnormal waste

Example: Waste by fire and accident.

Ø  Storage costs

Example: Rent of warehouse.

Ø  Administrative FOH unrelated to production

Example: Supervision expenses

Ø  Selling costs

Example: Commission to broker

Ø  Foreign exchange differences

Example: Value of PKR decreases in relation to dollar.

Ø  Interest cost when inventories are purchased with deferred settlement terms.

Example:

Cost Formulas:

Ø  Items which are not ordinarily interchangeable should be valued at individual cost basis.

Ø  For interchangeable items FIFO and Weighted Average Cost methods are used.

Write-Down to Net Realizable Value:

Ø  NRV 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.

Ø  Any write-down to NRV should be recognized as an expense in the period in which the write-down occurs.

Ø  Any reversal should be recognized in the income statement in the period in which the reversal occurs.

Expense Recognition:

IAS 18 Revenue:

When inventories are sold and revenue is recognized, the carrying amount of those inventories is recognized as an expense.

[IAS 2.34]

Any write-down to NRV and any inventory losses are also recognized as an expense when they occur.

Disclosure

Ø  Accounting policy for inventories

Ø  Carrying amount, of merchandise, supplies, materials, work in progress, and finished goods.

Ø  carrying amount of any inventories carried at fair value less costs to sell