Lkas 2 inventories

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SRI LANKA ACCOUNTING STANDARD 2 INVENTORIES

Prepared by:- K.M.T.Nishshanka Muhandiram

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HISTORYOriginally IAS 2; Valuation and presentation of Inventories in the context of the

Historical cost system issued in October 1975.

Replaced by IAS 2; Inventories issued by IASC in December 1993.

SIC-1;Consistency-Different Cost Formulas for Inventories was issued by Standing Interpretations Committee in December 1997.

Limited amendments to IAS 2 were made in 1999 & 2000.

In April 2001, IASB resolved to apply ALL Standards & Interpretations issued under previous constitutions unless they were amended or withdrawn.

SIC-1 was replaced and IAS 2 was revised by IASB in December 2003.

Subsequently IAS 2 was amended by IFRS 8 Operating Segments; which was issued in November 2006.

In Sri Lanka SLAS 5 was amended as LKAS 2 Inventories

LKAS 2Prepared by:- K.M.T.Nishshanka Muhandiram

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APPLICABILITY

Should be applied for annual periods beginning on or after January 1, 2005 to ALL inventories except those which have been specifically excluded from its scope.


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OBJECTIVE

To prescribe accounting treatment for inventories.

To provide guidance on determination of cost and its subsequent recognition as an expense, including any write down to NRV.

To provide guidance on cost formulas used to assign cost to inventories.


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SCOPETHIS STANDARD APPLIES TO ALL INVENTORIES, EXCEPT:

Types of Inventories which are outside the scope of LKAS 2

Types of Inventories which are exempted ONLY from measurement requirements of standard but are within the scope of other requirements in the standard.

Work in progress arising under construction contracts [LKAS 11]

Financial Instruments [LKAS 32 and LKAS 39]

Biological Assets related to agricultural activity and agricultural produce at the point of harvest [LKAS 41]

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 realizable value.

Commodity broker-traders who measure their Inventories at fair value less costs to sell.


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DEFINITIONS 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.

Net realizable 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.


Raw Materials Work in Progress Finished Goods

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MEASUREMENT OF INVENTORIES

Due to amendment in LKAS 21; Effects of changes in foreign exchange rates, exchange differences arising from the acquisition of inventories invoiced in a foreign currency are not to be included in Cost Of Purchase.

Inventory purchased on deferred settlement termsDifference between Normal purchase price and amount paid to be recognized as Interest Expense.

CostNet Realisable Value

Whichever is lower


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COST OF INVENTORIESCosts of Purchase

Purchase price+ Import duties+ Other taxes (other than those

subsequently recoverable by the entity from the taxing authorities)

+ Transportation costs+ Handling costs+ Other costs directly attributable to

the acquisition of finished goods, materials and services.

(-) Trade discounts(-) Rebates and other similar items** Abnormal waste and

administrative overheads unrelated to production is not a cost of purchases.

Cost of Conversion

Costs of conversion includes:

1. Costs directly related to production (such as direct labor)

2. Allocated variable production Overheads

3. Allocated fixed production Overheads (based on the normal capacity*)

[Un-allocated overheads are recognized as expense]

4. In case of Joint Products; costs are allocated between the products on a rational & consistent basis.

Other Costs•Other costs are included to the extent they are incurred in bringing the inventories to their present location and condition.

For example: Costs of designing products for specific customers can be included in the cost of inventories.

•LKAS 23; Borrowing Costs identifies limited circumstances where borrowing costs are included in the costs of inventories.

*Normal Capacity is the production expected under normal circumstances, after adjusting loss of capacity.


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COSTS OF INVENTORIES OF A SERVICE PROVIDER

To the extent that service providers have inventories, they are measured at:

Cost of production

+ Labor and other Personnel costs

+ Attributable overheads

Х Labor & other costs relating to sales

and general administrative personnel.

Х Profit Margins.

Х Non-attributable overheads.

COSTS OF AGRICULTURAL PRODUCE HARVESTED FROM BIOLOGICAL ASSETS

Measured at:

Fair Value

(-) Estimated point of sale costs at the time of harvest.


COST OF INVENTORIES CONT.

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TECHNIQUES FOR THE MEASUREMENT OF COST

Methods mentioned below can be used as per the convenience if the results approximate costStandard Cost Method

Standard costs take into account normal levels of materials and supplies, labor, efficiency and capacity utilization.

They are regularly reviewed and, if necessary, revised in the light of current conditions.

Retail Method

The retail method is often 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.

The cost of the inventory is determined by reducing the sales value of the inventory by the appropriate percentage gross margin.


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COST FORMULAS

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An entity shall use the same cost formula for all inventories having a similar nature and use to the entity. For inventories with a different nature or use, different cost formulas may be justified.


COST FORMULAS - COMPARISON

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NET REALIZABLE VALUE Where cost of inventories is not recoverable due to damage, obsolescence,

decline in selling price, or if estimated costs of completion or estimated costs to be incurred to make sale have increased.

Materials and other supplies held for use in production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost.

However, when a decline in price of materials indicates that cost of finished products exceeds NRV, the materials are written down to NRV. In such circumstances, the replacement cost of the materials may be the best available measure of their NRV.


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Write-down of Inventories• Inventories are usually written down to NRV item by item. • Similar items which are produced & marketed in same geographical area and which

can’t be separately evaluated from other items in the product line can be grouped. However it’s not appropriate to write-down inventories on the basis of classification.

• In case of Service providers, each service is treated as separate item and costs in respect of each such service is accumulated.

Estimates for NRV• Should be based on most reliable evidence.• These estimates take into consideration:

Fluctuations of price/cost occurring after the end of period. Purpose for which Inventory is held.

Assessment for NRV• Done in each subsequent period.• If earlier circumstances are not there, the amount of write-down is reversed; but

limited to the original write-down.LKAS 2

NET REALIZABLE VALUE

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NET REALIZABLE VALUE VS FAIR VALUE

Net Realisable Value

Estimated selling price (in the ordinary course of business)(-) Estimated costs of completion(-) Estimated costs necessary to make the sale

Amount that an entity expects to realise from the sale of inventory in the ordinary course of business.

This method of valuation of inventories is open to all types of inventories referred in this standard.

Fair Value

Amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

This is not entity specific.

This method is specifically mentioned for Commodity broker-traders.

* “NRV” may not be equal to “Fair value (-) costs to sell”


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RECOGNITION AS AN EXPENSE When Inventories are sold Carrying Amount of

inventories is recognized as an Expense

When Inventories are written Amount of Write-down anddown to NRV all losses of inventories

should be recognized as an Expense.

In case of increase of NRV Amount of Reversal (if any) shall be recognized as a reduction in the amount of inventories recognized as an expense earlier.

In case Inventories are Such Inventories should be allocated to other asset recognized as an expense accounts (such Plant & Equipment) during the useful life of that

asset.*Amount of Inventories recognized as expense during the period are often referred to as Cost of Sales.

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CLASSIFICATIONCommon classifications

Merchandise

Production Supplies

Materials

Work in Progress

Finished Goods

The inventories of a service provider may be described as work in progress.


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DISCLOSURE

The financial statements shall disclose:

1) Accounting policies (Valuation method), including cost formula used;

2) Total carrying amount of inventories and classifications;

3) Carrying amount of inventories carried at fair value less costs to sell;

4) Amount of inventories recognized as an expense;

5) Amount of any write-down of inventories recognized as an expense;

6) Amount of any reversal of any write-down that is recognized as a reduction in the amount of inventories recognized as expense;

7) Circumstances that led to the reversal of a write-down of inventories; and

8) Carrying amount of inventories pledged as security for liabilities.


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CONCLUDING REMARKS

Inventory consists of all Raw Material, Work-In-Progress, & Finished Goods.

Inventory should be valued at the lower of Cost and NRV.

Inventory cost includes Cost of Purchase, Cost of Conversion, and Cost of Others.

NRV is determined by = Estimated Selling price – (Estimation Selling Costs + Estimation Completion Costs).

Costs formulas can be used either FIFO or WAC where as LIFO is prohibited in Sri Lanka.

Disclosures includes - policy of value, cost formula used, carrying amount, expense recognized, written down value, reason for written down, pledge details. Prepared by:- K.M.T.Nishshanka Muhandiram

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Prepared & Presented by:- K.M.T.Nishshanka MuhandiramBABY DACE_2.3gp

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Lkas 2 inventories