International Accounting Standard with examples

7/30/2019 International Accounting Standard with examples

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Inventories

IAS 2


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Objective

The objective of this standard is to

prescribe the accounting treatment forinventories.


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Scope

IAS 2 excludes certain inventories:

work in process arising under construction

contracts (see IAS 11 Construction Contracts)

financial instruments (see IAS 39 FinancialInstruments: Recognition and Measurement)

biological assets related to agricultural activityand agricultural produce at the point of harvest(see IAS 41 Agriculture).
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Definitions

Inventories are assets:

Held for sale in ordinary course of business

In the process of production for such sales

Material or supplies used in productionprocess or to render services

Net Realizable Value

It is the estimated selling price less the cost tocomplete and sell


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Measurement of inventory

Inventory should be measured at lower of

cost or net realizable value


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Realisable value

Realisable value is, of course, the price theorganisation receives for its inventory from themarket.

However, getting this inventory to market mayinvolve

additional expense and

effort in repackaging,

advertising, delivery and

even repairing of damaged inventory.


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Which Value you shouldassign to inventory?

Item Cost (Rs) Net realisable value (Rs.)

1 No. 876 7,000 9,000

2 No. 997 12,000 12,500

3 No. 1822 8,000 4,000


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Cost of inventories

Cost should include all:

costs of purchase (including taxes,

transport, and handling) net of tradediscounts received

costs of conversion (including fixed and

variable manufacturing overheads) and other costs incurred in bringing the

inventories to their present location and

condition


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Costs not to be included in theinventory cost

Abnormal losses of material, labor etc

Storage costs

Administrative overheads that are not to bring theinventories at present location or condition

Selling costs

Borrowing costs (with some exceptions)

foreign exchange differences arising directly onthe recent acquisition of inventories invoiced in aforeign currency


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Techniques of measurement of

cost

Standard cost method

Retail method


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Cost Formulas

Items which are not ordinarily

interchangeable should be valued atindividual cost basis

FIFO and WAVC are benchmark

treatment LIFO is no longer allowed


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Recognition as an expense

The inventory cost should be recognized

as an expense in the period in which theirrevenue is recognized


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Disclosure

Policy to measure inventories including cost formula Total carrying amount of inventory with classification

Carrying amount of inventory carried at netrealizable value

The amount of any reversal of any write-down ofinventory that is recognized as revenue in the period

The circumstances and events that have causedthis reversal

Carrying amount of inventories pledged as securityagainst a liability


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Activity

1. Value the following items of inventory:

Material costing $12,000 bought for processing andassembly for a profitable special order. Sincebuying these items, the cost price has fallen to $10,000

Equipment constructed for customer for an agreedprice of $ 18,000. This has recently beencompleted at a cost of $ 16,800. It has now beendiscovered that , in order to meet certainregulations, conversion with an extra cost of $4,200 will be required. The customer has acceptedpartial responsibility and agreed to meet half theextra cost.


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Practise Question

Q1. The cost of inventories held by

Bonus Ltd. is Rs. 350,000. The estimatedselling price of inventories is Rs.300,000. The company pays Rs. 5%commission on sales to manager.

You are required to calculate the value atwhich inventories should appear in theStatement of Financial Position.

Documents

International Accounting Standard with examples