LACPA IFRS Presentation Inventories IAS 2 LACPA IFRS Presentation

1. Introduction – definitions Overview of session 1. Introduction – definitions 2. Measurement 3. Recognition 4. Disclosure 5. Questions

1. Introduction – definitions Inventories 1. Introduction – definitions

Definitions Inventories 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 An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Inventories 2. Measurement

Inventories are stated at the lower of cost of and net Measurement Inventories are stated at the lower of cost of and net realisable value.

Cost Cost of Production: Cost of Purchase Other Costs Conversion

Cost components Cost of purchase comprises purchase price import duties transport and handling costs any other directly attributable costs less trade discounts, rebates and subsidies may include foreign exchange differences, which arise directly on acquisition of inventories invoiced in a foreign currency (refer IAS 21)

Cost components Cost of conversion comprises: Costs, which are specifically attributable to units of production, that is direct labour, direct expenses and sub-contracted work. Production overheads: overheads incurred in respect of materials, labour or services for production, based on the normal level of activity, taking one year with another.

Cost components Other costs may include overheads, attributable in the particular circumstances of the business to bringing the product or service to its present location and condition, e.g. design costs. Excluded costs: Usually selling expenses, general administrative overheads, research and development costs and interest costs are not considered to relate to putting the inventories in their present location and condition.

Cost Formulae Specify the components attributable to the cost of inventory Cost formulae: First in First Out (FIFO) formula Weighted Average Cost formula Prohibited Treatment: Last in First Out (LIFO) formula Consistency required across each type of inventory:

Cost Formulae FIFO: the calculation of the cost of inventories on the basis that quantities on hand represent the latest purchases or production. This method assumes that the oldest inventories are used up first. Weighted average cost: the calculation of inventories by using an average price computed by dividing the total cost of units by the total number of such items. An entity needs to use the same cost formula for all inventories of a similar nature and use to the entity

Cost components Which of the above cost categories do the following costs belong to? Cost Cost Category Selling costs Direct labour Design of finished goods Import duties on raw material Fixed production overhead Purchase of raw material Abnormal amounts of wasted material

Cost components Answer Cost Cost Category Selling costs Excluded Direct labour Cost of conversion Design of finished goods Other costs Import duties on raw material Cost of purchase Fixed production overhead Purchase of raw material Abnormal amounts of wasted material

Cost Formulae Question: ABC trades in chocolates and made the following purchases and sales in the period. There are 10 units left at balance sheet date. Calculate the cost of stock using FIFO and weighted average cost formulae Transaction Period Quantity Price Total WAC Purchase June 3 units $ 20 $ 60 July 7 units $ 30 $ 210 Sale August 4 units September $ 40 $160

Cost Formulae Answer: FIFO: 4 at $40 plus 6 at $30 = 160 plus 180 = $ 340 Weighted average: Transaction Period Quantity Price Total WAC Purchase June 3 units $20 $60 July 7 units $30 $210 Remaining 10 units $270 $27.0 Sale August 4 units 6 units $162 September $ 40 $160 $322 $32.2

Net realisable value Measured at lower of : Cost and Net Realisable Value Net Realisable Value The estimated selling price in the ordinary course of business less the estimated costs of completion and estimated costs necessary to make the sale Selling Price X Trade Discounts (X) Costs to Completion (X) Marketing, Selling and Distribution Costs (X) Net Realisable Value X

Cost vs. NRV calculation

Inventories 3. Recognition

What are the Dr and Cr involved in a sale of inventory? Recognition Inventory is a current asset Inventory is expensed… …when the related revenue is recognised The expense of a write down to NRV is recognised… …when the write down occurs What are the Dr and Cr involved in a sale of inventory?

Recognition Inventory: Dr Cost of Sales 100 Cr Inventory 100 Sale: Dr Cash 150 Cr Sales 150 Write-down to NRV Dr Profit and Loss – Inventory write down Cr Inventory

Inventories 4. Disclosures

Disclosures Accounting policy Balance Sheet Income Statement

Disclosures Accounting policy: Balance Sheet Income Statement identify cost formula used (FIFO or weighted average) Cost components Valuation (lower of cost or NRV) Balance Sheet Carrying amount of inventories (on face of BS) Analyse inventories by classification (e.g. raw materials, finished goods etc…) Income Statement Cost of inventories expensed in period Expense of inventory write-downs included under other operating expenses

Inventories 5. Questions