IAS 02INVENTOR

Y

Presented by: Nguyen Huy Hoang

OVERVIEW – IAS 2

01Objective & Scope

02Measurement

03Recognition

04Disclosure

05Comparision

OBJECTIVE & SCOPE

WORK IN PROGRESS

FINISHED GOOD

Held for sale

RAW MATERIALS

.

INVENTORY

ASSETS

OBJECTIVE & SCOPE

Inventories of financial instruments

( IAS 32 )

Construction contract WIP

( IAS 11 )

Biological inv related to agriculture( IAS 41 )

.

INVENTORY

IAS 2

EXCLUDE

WWH

What cost are included ?

Which cost formulars are permitted ?

How NRV is determined ?

NEEDTOKNOW

MEASUREMENT

Conversion costs

Purchase costs

Othercosts

COSTS INCLUDED

MEASUREMENT

Purchase costs

COSTS INCLUDED

Less trade

discounts,

rebates, subsidie

s

Purchase

Price Transport

Handling

Import

Duties,

Taxes

Other Directly

attributable costs

Lessforeign

exchange differences(IAS 21)

MEASUREMENT

COVERSION COST

Direct Labour Fixed productionoverhead

Variable productionoverhead

MEASUREMENT

COVERSION COST

Variable productionoverhead

Fixed productionoverhead

Characteristicschange according to changes in the level of activity or volume.

Don’t change significantly with the level of production

ExamplesIndirect materials, Indirect labour and other variables costs such as electricity, office supplies

Plant property taxes, Office and factory rent, insurance, etc..

Allocation to Inventory Based on actual usage Based on the normal

operating capacity.

MEASUREMENT

JOINT PRODUCTTwo or more outputs generated simultaneously, by a single manufacturing process using common input, and being substantially equal in value. Joint products are separately unidentifiable, and incur undifferentiated joint costs, until they reach the split-off point.

So how to allocate Joint cost ?

JOINT PRODUCT- When products become

separable, they will be allocated between rational and consistent basis such as relative sales value of products

- If small in value, do not allocate: Measure by-product at NRV and deduct this amount from main product costs.

OTHER INVENTORIABLE COSTS

MEASUREMENT

- Include those costs that are used in bringing inventories to their present location and condition

- Example: non production overheads or cost of designing products for specific customers.

- Borrowing cost: in some specific conditions (interest) can be included in inventory costs.

Abnormal wastes

Financing chargesAbove purchase price for nomal credit term

Storage & WarehouseUnless nesscessary for next stage of Production.

Adminstrative overheadsNot associated with production.

Selling costs

MEASUREMENT

DON’T

ADD

TO

INVENTORY

COSTS

Of materials, labour or other production cost

MEASUREMENT

Which of the above cost categories do the following costs belong to? Cost Cost categories

Selling cost

Direct labour

Design of finished goods

Import duties on raw material

Fixed production overhead

Purchase of raw material

Abnormal amount of wasted material

MEASUREMENT

Which of the above cost categories do the following costs belong to? Cost Cost categories

Selling cost Excluded

Direct labour Conversion

Design of finished goods Other

Import duties on raw material Purchase

Fixed production overhead Conversion

Purchase of raw material Purchase

Abnormal amount of wasted material Excluded

01

02

Standard CostMethodused for accounts of normal level of materials, supplies, labours, efficiency and capacity

Retail inventoryMethodused in retail industry for measuring large number of rapidly changing items.cost is determined by reducing the sales value of inventory by percentage gross margin.

MEASUREMENT TECHNIQUES

Cost FormulasSpecific

Identification- Not interchangeable

inventory- For specific projects- Inappropriate when

there are large number of items that are changeable

FIFO

cost of latest purchases ends up in cost of ending inventory, cost of earliest purchases are in cost of goods sold.

Weighted Average

weighted average cost of all goods available for sale ends up in both ending goods available for sale and cost of goods sold

- Assign recent cost to ending inventories- 3 types of cost fomulas used depending upon the nature of inv

Same nature of inventories => same cost formulas

• PRINCIPLEInventories are measured at the

lower of cost and net realizable value ( LC and

NRV )

MEASUREMENT

How are the inventories measured ?

NRV Cost

MEASUREMENT

• NRV is the estimated selling price of items in business less than the estimated costs of completion and and estimated costs of sale

Expected selling price

Cost to complete item for

sale

Cost to sale

Net realizable

value- - =

The adjustment to NRV is usually applied on an item-to-item basis

Product Unit on hand

Original cost per unit

Estimated cost to sale

Expected selling price

101 10 $40 $15 $60

102 20 $60 $20 $75

The December 31, 2015 inventory of Fteam Company consists of two product: 10 units of 101 and 20 units of 102. Before adjustment, the cost and carrying amount of the total inventory is $1,600

Determine the amount of inventory to report on the Dec 31, 2016 Balance sheet and Prepare any necessary adjusting entry

Example

Product Original cost per unit (a)

Net Realizable Value (b)

Lower of (a) &

(b)

Units on

handInventory atLC and NRV

101 $40 $60 – $15 = $45 $40 10 $400

102 $60 $75 – $20 = $50 $50 20 $1,000

Adjusting entry:Inventory Loss – LC and NRV 200

Inventory 200To write inventory down to the lower cost and net reliable value: $1,600 - $1,400 = $200

Solution

ExampleAssume that 10 units of inventory product 102 from the example above remain in inventory at 31 April 2016. The cost to sell each unit is still $20, but the market has recovered for these items and their expected selling price is now $90. What adjusting entry, If any, is needed at 31 April, 2016

REVERSALS

The NRV of inventory is reassessed at each

financial reporting date

Further reduction

Reverve previous writedowns

REVERSALS

Reversals (recognized in P & L)

The situation that caused the previous write down

no longer exits

Clear evidences due to changed economic

circumstances=> NRV has increased

SolutionProduct Cost NRV LC and

NRV Quantity Inventory at LC and NRV

102 $60 $70 $60 10 $600

Carrying amount before adjustment $50 10 $500

Writedown reversal needed $100

Adjusting entry:Inventory 100

inventory lost recovered - LC and NRV 100To adjust inventory for recovery in NRV

Recognition

- Inventory is a current asset

- Inventory is expensed (COGS)……. when the related revenue is recognized……

- Inventory adjustments (losses, writedowns to LC and NRV, writedown revesals, etc.) are recognized as an adjustments to the expense which recognized in the period.

DISCLOSUREAccounting policies applied• Identify cost formula used (FIFO or Weighted average)• Cost components• Valuation (LC or NRV)Balance sheet• Carrying amount in each category of inventory• Carrying amount of any inventory measured at fair

value less costs to sell• Carrying amount of inventory pledged as collateral for

liabilitiesIncome statement• Cost of inventories expensed in period• Amount of writedowns to NRV or other losses• Amount of any writedown reversals• Circumstances that resulted in reversals

Comparision

Inventory should be measured at the lower of cost or net realizable value.Cost should be assigned using the FIFO or weighted average cost methods.LIFO is an alternative treatment.When the cost of inventories is determined using the LIFO method, the financial statements should disclose the difference between the amount of inventories as shown in the balance sheet and the amount which would have been shown if prepared in accordance with FIFO or weighted average cost methods.

A provision for the decline in the value of inventory can be recorded if there is an apparent evidence of a continuous decline in the market value of such inventory. Goods issued can be valued under any of following methods:1. Specific identification2. Weighted average method3. FIFO4. LIFO

  Inventory is defined as assets:1. held for sale in the ordinary course of business2. in the process of the production for such sale;

or3. in the form of materials or supplies to be

consumed in the production process or in the rendering of service

  

Inventory is defined as current assets that include:1. Goods in transit2. Raw materials3. Tools and supplies4. Work in progress5. Finished goods6. Merchandises7. Goods on consignment

IAS VAS

Comparision

IAS VASThe allocation of fixed production overheads to the cost of conversion is based on the normal capacity of the production facilities The amount of fixed overhead allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognized as an expense in the period in which they are incurred. 

Unpredictable idle cost is transferred to the Prepayments account.

Comparision

IAS VASThe allocation of fixed production overheads to the cost of conversion is based on the normal capacity of the production facilities The amount of fixed overhead allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognized as an expense in the period in which they are incurred. 

Unpredictable idle cost is transferred to the Prepayments account.

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