Ind AS-2 INVENTORIES by CA, D.S.RAWAT Partner, BANSAL & Co.

Scope Inventories are assets :  held for sale in 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

Scope Does not apply :  agricultural produce which are measured at fair value less cost to sell  commodity brokers and dealers who measures their inventories at fair value less costs to sell through profit and loss account

Measurement of inventories Inventories shall be measured at the lower of cost and net realizable value

Costs of inventories Comprise of :  Purchase cost  Cost of conversion  Other cost incurred in bringing the inventories to their present location and condition

Costs excluded from inventories  Abnormal cost  Storage cost  Administrative overhead  Selling cost

Costs of purchase  Comprise the purchase price, import duties and other taxes (other than those subsequently recoverable from tax authority), other cost directly attributable less trade discounts and rebates  In deferred payment system element of financial cost excluded.

Costs of conversion Costs directly related to the units of production, such as direct labor cost and systematic allocation of fixed and variable production overheads

Allocation of fixed production overheads Allocation based on normal capacity of the production facility

Joint products and by-products  When joint products are produced – Main product and by-product  When conversion of each product not identifiable rational and consistent method be followed

Techniques for measurement of cost Techniques like, standard cost method or retail method may be used for convenience if the results approximate cost.

Cost formulas  Items not ordinarily interchangeable or goods or services produced for specific projects – specific identification of cost.  Other than above FIFO or weighted average cost method

Net realizable value Expected selling price less cost to sell

Recognition as an expense  When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised.  Inventories allocated to another asset are recognised as an expense during the useful life of that asset.

Disclosure  Accounting policies – measurement and cost formula  Classification and carrying amount of the inventories  Inventories carried at fair value less cost to sell  Inventories recognised as an expense  Any reversal of write-down  Circumstances led to reversal or write-down  Carrying amount of inventories pledged.

Case Study -1 The production of whisky involves the distilling of aged whisky in a cask prior to bottling. Can storage cost be included in the cost of inventory? Answer: Capitalization of storage costs is allowed only if the storage is necessary in the production process prior to further production stage. Therefore, in this situation, the storage cost the entity incurs during the distilling process should be capitalized, as aging is integral to making the finished product saleable.

Case Study -2 A company supplies car parts to a major manufacturer. At the year end it had inventories of parts and carrying value was Rs. 10 lakhs. However, after the year end the manufacturer changed the models of the cars and as a result the inventories became obsolete (the part is not interchangeable between models). Should the company provide against the inventories at the year end?

Case Study -2 Answer: Ind AS-10, ‘Events after the balance sheet date’, requires an adjustment to amounts recognised at the balance sheet date for the events occurred after the balance sheet date. Ind AS-2 states, ‘Estimates of net realizable value are based on the most reliable evidence available at the time the estimates are made, of the amount the inventories are expected to realize. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period’

Case Study -2 This rises the question of whether the condition existed at the year end. It might be argued that the change of model by manufacturer is a condition that did not exist at the year end and, therefore, the loss is post balance sheet event. However, it is likely that the manufacturer would have been considering the change over a long period (including the period prior to the year end) even if it did not announce the change until after the year end. In addition, the high inventory levels may have indicated slow demand from the manufacturer. This confirmed by the post balance sheet announcement confirming the over-supply at the year end.

Case Study -2 Therefore, the condition (the likelihood that the models would change and the resultant potential loss) is likely to have existed at the year end and, therefore, the post balance sheet confirmation of the change of model and the resultant loss should be reflected in the carrying value of the inventories at the year end.

Case Study -3 A car distributor values its items of inventory at the year end. Rebates are only received from the car manufacturers one a year and are only known after the year end, but relate to purchases in the current period. Should the rebates be taken through the income statement is a deduction in the cost of sales without allocation to the items in inventory at the balance sheet date or should a proportion of the rebates be allocated to the inventory items at the year end?

Case Study -3 Ans- A proportion of the rebates should be allocated to inventory items at the year end. For example, if purchases during he year are 100 and there is inventory with a cost of 10 at the year end, 10% of the rebate should be applied to the inventory items at the year end and 90% should be taken through the income statement s a deduction in the cost of sales.

Case Study -3 The reasoning is that the rebates cannot be allocated to particular items in the year, therefore, they, should be spread over all the items purchased during the year, sold or unsold.

THANK YOU CA, D.S.RAWAT Partner, BANSAL & Co.