Business Administration, KU

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International Accounting Standers (IAS – 02) : Valuation of

Inventory

Content:

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• Introduction• Definition• Objective• Related standards• Scope• Cost of Inventories• Measurement of

inventories• Methods of inventories• Disclosure

Introduction :

International Accounting Standard 2 Inventories (IAS 2) replaces IAS 2 Inventories (revised in 1993) and

It should be applied for annual periods beginning on or after 1 January 2005.

It was revised in 2003 with the main objective of reducing the alternatives for the measurement of inventories

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Definition of inventory :

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Inventories are assets:Held for the sale in the ordinary course of

business (Finished Goods).In the process of production of such sale (Raw

material and working progress).In the form of materials and supplies to be

consumed in the production process or in the rendering of services (Stores, Spares, Raw material).

Inventories do not include machinery.

Objective :

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Prescribes the accounting treatment for inventories. Provides a primary issue in accounting for inventories is the

amount of cost to be record. Formulate the method of computation of cost of

inventories/stock. Determined the value of closing stock at which it is to be

shown in balance sheet till it is not sold and recognized as revenue.

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Related Standards

IAS 11 : Construction contracts IAS 32 : Financial instruments: Disclosure

and Presentation IAS 39 : Financial instruments: recognition

and measurement IAS 41 : Agriculture

DOES NOT APPLY TO THE FOLLOWING

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Determination of Cost of Inventories :

Cost of Inventories Includes: Cost of Purchase Cost of Conversion Other Costs (incurred in bringing the inventories

to their present location and condition)

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Cost of Purchase : The costs of purchase of inventories comprise the

purchase price, import duties and other taxes transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services

Trade discounts, rebates and other similar items are deducted in determining the costs of purchase.

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Cost Of Conversion

It Consists of the cost directly related to the units(Direct Labor, Direct Material, Direct Expenses)

Add: Systematic allocation of fixed and variable

production overheads that are incurred in converting material into finished goods.

Other costs

Other Costs are recognized only if incurred in bringing the inventories to their present location and condition; never include the following:

Abnormal Costs Storage Costs Administrative Overheads and Selling

Costs

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Measurement of Inventory :

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Inventories should be valued at the lower of cost and net realizable value.

Net realizable valueRealizable value is, of course, the price of the organization receives for its inventory from the market. However, getting this inventory to market may involve additional expense and effort in repackaging, advertising, delivery andeven repairing of damaged inventory.

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

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Which Value you should assign 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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Costs not to be included in the inventory cost : Abnormal losses of material, labor etc Storage costs Administrative overheads that are not to bring

the inventories at present location or condition Selling costs Borrowing costs (with some exceptions)

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Methods of computing Inventories

First-in, First-out (FIFO)Last-in, First-out (LIFO)Weighted-average cost (WAC)

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First-in, First-out (FIFO) This method assumes that the first unit acquired are

the first unit sold The costs of ending inventories is that of the most

recent purchases A major criticism of FIFO: Improper matching of

cost with revenues since the cost of goods sold is computed on the bases of old price that are possibly unrealistic

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Last-in, First-out (LIFO) This method assumes that the last unit acquired are

the first unit sold The cost of the units in the ending inventory is that of

the earliest purchases The chief advantage of LIFO is that balance sheet

value of inventories may be outdated and unrealistic

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Weighted average Cost (WAC) This method assumes that the goods available for the sale

are homogeneous The average cost is computed by dividing the cost of goods

available for sale by the number of the units available by sale

The major criticism of WAC is that it assigns no more importance to current prices than to past prices paid several months ago

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COST OF GOODS SOLD FORMULA :

Amount Opening Inventory X Add: Purchases X Add: Carriage Inwards X Less: Returns Outwards (X) Total goods Available X Less: Closing Inventory (X)COST OF GOODS SOLD X

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Disclosure :

Disclosures needed for: Accounting policies applied Inventory remaining on statement of financial

position Inventory costs recognized in profit or loss

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Disclosure ( cont….)Balance sheet related disclosures:

Carrying amount in each category of inventory (materials, WIP, finished goods, production supplies, merchandise) and in total

Carrying amount of any inventory measured at fair value less costs to sell

Carrying amount of inventory pledged as collateral for liabilities

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Disclosure ( cont….)Income statement related disclosures:

Amount of inventory recognized as an expense (usually cost of sales/cost of goods sold)

Amount of write-downs to NRV or other losses Amount of any write-down reversals Circumstances that resulted in reversals

THANK YOU

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