Accounting for Inventories
Scope and Objective of IAS 2
Inventories within the scope of IAS 2 are assets
held for sale in the ordinary course of business (finished goods)
in the process of production in the ordinary course of business (work in progress)
in the form of materials and supplies that are consumed in production (raw materials) or in the rendering of services
Assets that are excluded from the scope of IAS 2 include
Work in progress arising under construction contracts
Financial instruments
Bioloigcal assets related to agricultural activity and agricultural produce at the point of harvest
IAS 2 does not deal with initial recognition, instead the general rule applies - inventories will be recognised as an asset when the entity obtains control
The main concern in inventory accounting is the amount of cost to be recognised as an asset and carried forward until the related revenue is recongised
The aim of IAS 2 is to streamline the accounting method for inventories, providing guidance on the determination of cost and its subsequent recognition a an expense, including any write down to NRV
Measurement and cost of inventories
IAS 2 requires inventories to be measured at the lower of cost and NRV
The cost of inventories comprises all costs of
Purchase (including taxes, transport and handling), net of trade discounts received
Costs of conversion (including fixed and variable manufacturing overheads)
Other costs incurred in bringing the inventories to their present location and condition
Inventory cost does not include
Abnormal waste
Storage costs
Administrative overheads unrelated to production
Selling costs
Foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency
Interest cost when inventories are purchased with deferred settlement terms
Methods of costing inventories
Standard costing
Usually associated with a manufacturing company
The practice of assigning an expected or standard cost for an actual cost and periodically analysing variances between the expected and actual costs into various components (direct labour, direct material and overhead) auto maintain productivity
Retail method
Used by retailed that resell merchandise
A technique used to estimate the value of ending inventory using the cost to retail price ratio
The retail. inventory method works when there is a clear relationship between the price purchased from a wholesaler and the price sold to customers and the mark up is consistent across all products sold - such as if a retailer marks up every item by 80% of the wholesale price
For inventory items that are not interchangeable, specific costs are attributed to the individual items of inventory
For items that are interchangeable, IAS 2 allows the first in, first out or weighted average cost formulas
An entity should use the same cost formula for all inventories having a similar nature and use to the entity
Write down to NRV
NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale
Any write down to NRV should be recognised as an expense in the period in which the write down occurs
Any reversal should be recognised in the statement of P&L and OCI in the period which the reversal occurs
Disclosure
Accounting policy for inventories
Amount of any write down of inventories
Cost of inventories recognised as expense
Amount of ay reversal of write down to NRV and the circumstance that led to such reversal
Separate disclosure of inventories carried as assets at the period end inluding
Carrying amount, generally classified as merchandise, supplies, materials, work in progress and finished goods
Carrying amount of any inventories carried at fair value less costs to sell
Carrying amount of inventories pledged as security for liabilities