IAS 2: Inventories

Overview of IAS 2 What it does: It prescribes the accounting treatment for inventories; It gives guidance on determining the cost of inventories and their subsequent recognition as an expense; It prescribes the measurement rules including the net realizable value It gives guidance on the cost formulas (FIFO and weighted average).

What are inventories ? They are assets: held for sale in the ordinary course of business; in the process of production for such sale; or in the form of materials or supplies to be consumed in the production process or in the rendering of services. Work in Progress Merchandise Materials Work in Progress Production supplies

Measurement of inventories Inventories should be measured at the lower of : Producers of agricultural, forest products, minerals and mineral products. Commodity dealers and brokers Rule Cost Net Realizable Value (NRV) Measurement exceptions:

Measurement of inventories Abnormal waste (Material, labour, other) Storage costs (but include those necessary in the production costs) Administrative Overheads Selling costs Cost Purchase Cost of conversion Other Costs Don’t include:

Cost : Measurement techniques For convenience to approximate cost of inventories: Producer of large amounts of small items Retailers with large turnover of inventories with similar profit margins Standard costs Retail cost

Cost Formulas Are the inventories not interchangeable ? Are the goods or services produced or segregated for specific purpose ? Yes No Specific costs Cost Formulas FIFO Weighted Average

Net realizable value (NRV) If NRV < costs => Write-down Occurs when: Physical deterioration of inventory Increase in costs or fall of Selling price Estimated Selling Price Estimated Cost of completion Estimated costs

How should we depreciate major spare parts that are a part of PPE? Accounting for spare parts Main issues Should we recognize and present them as property, plant and equipment (“PPE”) or as inventories? How should we depreciate major spare parts that are a part of PPE?

Criteria Consider : Purpose: Production or resale Time aspect: > 1year Yes No Yes No indicate they are inventories might be considered PPE. might be considered PPE. inventories

Materiality Sometimes, you can have an asset that is used in the production process for more than 1 period, but its acquisition cost is very small. For example, small tools used for more than 1 period. It would be very hard to label each individual screwdriver, not mentioning depreciation! assess materiality, or significance of similar spare parts and servicing equipment for your financial statements. on an individual, asset-by-asset level, but also materiality of the whole group of these assets.

Unit of Account is it the individual single screwdriver with the cost of USD 5? Or, is it the set of 5 000 screwdrivers with the cost of USD 25 000 (5×5 000)?

Minimum Levels In some businesses, minimum levels of inventories must be maintained in order to operate assets. In this case, “inventories” are not separable from an item of PPE and such “inventories” are in fact a PPE. Example of Oil refinery.

Depreciation of Major spare parts How to Depreciate Spare Parts in PPE? Not addressed by standard must use judgment. NB: Depreciation should begin when asset is available for use. Depreciation of Major spare parts Critical spare parts Capital spare parts Star immediately Start when installed

Questions ?