Inventories
For most manufacturing businesses these items turn over relatively quickly as items are bought or produced and then sold to customers
For some more specialised business, inventory is held for longer as it takes longer to build, for example ships, buildings, oil rights etc
Accounting for most forms of inventory is dealt with by IAS 2 Inventories
Inventories are assets
Held for sale in the ordinary course of business
In the process of production for such sale
In the form of materials or supplies to be consumed in the production process or in the rendering of services
The primary issue in accounting for inventories is the amount of cost to be recognised as an asset until the related revenues are recognised
IAS 2 provides guidance on the determination of cost and its subsequent recognition as an expense, including any write down to net realisable value
Measurement
The usual rules apply, i.e inventories will be recognised as an asset once the entity has obtained control
IAS 2 requires inventories to be recognised at the lower of cost and net realisable value
Cost
Comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition
The cost of purchase of an item will include the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), 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
Conversion costs include costs directly related to the units of production such as direct labour. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods
The allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities
The amount of fixed overhead allocated to each unit of proaction is not increased as a consequence of low production or idle plant
Unallocated overheads are recognised as an expense in the period in which they are incurred
Variable production overheads are allocated to each unit of production on the basis of the actual use of the production facilities
Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition
Some entities will hold items of inventory that are not ordinary interchangeable and both these and goods or services produced and segregated for specific projects should have their costs individually assigned to them. However spefici identification of costs is inappropriate when there are large numbers of items of inventory that are ordinarily interchangeable
Costs can be assigned by using specified formulae, namely the first in first out or weighted average cost formula. An entity should use the same cost formula for all inventories having a similar nature and use to the entity
Weighted average - Cost of all goods sold / units available for sale
Net realisable value
The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partly obsolete or if their selling prices have fallen.
Cost of inventories may not be recoverable if the estimated costs of completion or the estimated costs to be incurred to make the sale have increase
The practice of writing inventories down below cost to net realisable value is consistent with the view that assets should no be carried in excess of amounts expected to be realised form their sale or use
Inventories are usually written down to net realisable value item by item. In some circumstances it may be appropriate to group similar or related items
Derecongition and disclosure
When inventories are sold, the carrying amount of those inventories is removed as an asset and recognised as an expense in the period which the related revenue is recognised.
The amount of any write down of inventories and all losses of inventories are recognised as a expense in the period the write down or loss occurs
Specific disclosures are required of significant accounting policies around inventories as well as separate disclosure of inventories carried as assets at the period end, the amount of inventories recognised as an expense and any write down of inventories including circumstances of the write down