Inventories

 Prescribes a/c treatment of inventories  Guidance in determining cost and  Subsequent recognition of expense including  Write-down to net realisable value

 Assets: ◦ Held for sale in ordinary course of business (finished goods) ◦ In the production of such sale (WIP) or, ◦ Materials/supplies used in production process or rendering of services (raw materials & consumables). (IAS2.6)

 Carried at lower of: ◦ cost or net realisable value (NRV) ◦ If NRV < cost then write down to NRV Elements of cost ◦ Purchase price excl. VAT ◦ Non-refundable taxes e.g. import duties ◦ Delivery costs & other costs of bringing the inventories to their present condition. e.g. designing costs ◦ Conversion costs (labour, depreciation of machinery, allocation of fixed/variable production overhead) Interest arising from deferred settlement terms recognised as an expense over period of financing

Costs excluded from the cost of inventory: o Abnormal wastage o Storage costs o General admin overheads o Selling expenses Expense above costs when they occur

 For costing purposes inventories divided into two categories: 1.Unique- specifically identifiable items 2.Uniform interchangeable units per inventory item (identical)  Specifically identifiable items ◦ Cost allocated in accordance with the specific identification method ◦ Cost of inventory includes the specific costs of each item necessary to bring the inventory to its present location  Uniform inventories ◦ Cost measured using either FIFO or weighted average (moving average) cost formula  the same cost formula for all inventories having a similar nature and use to the entity shall be applied  Inventories w/different nature or use may use different cost formulae  Geographical location not sufficient to justify use of different formulae

 All conversion costs included in cost of inventory  Fixed production o/heads allocated to cost of production based on normal capacity  Variable production o/head allocated on basis of actual use

 Recognised at spot rate on transaction date

 Measured at production/conversion costs  Exclude: ◦ profit margins ◦ Non-attributable overheads

 NRV = Selling price (ordinary course of business) – (completion + selling costs)  Write down to NRV when expected realisable value < cost  Each inventory item written down on item by item basis, or groups of similar items not on classification basis  Estimates of realisable value based on most reliable evidence available

 Not normally written down to NRV  May be written down when as a result of decline of price in rm, cost of finished goods > NRV  Replacement cost may be used as measure of NRV of rm

 When inventories sold: ◦ recognise carrying amount as expense, ◦ In period related revenue recognised  Write down of inventories: ◦ recognise loss/impairment as expense when it occurs,  Reversal of write down ◦ Recognised in period it occurs

 Presentation: ◦ Inventory presented as a separate line item is SFP ◦ If material – separate classes of inventory should be disclosed (e.g. raw materials, WIP, finished goods) ◦ COS must be disclosed as separate line item if SPLOCI is presented by function  Disclosure: (IAS 2:36 a-h) ◦ Accounting policy in measuring inventory & cost formula used

Disclosure SFP: ◦ CA of inventories ◦ CA in classifications appropriate to entity ◦ CA of inventories held at FV – cost to sell ◦ CA of inventories pledged as securities for liabilities Disclosure SOPLOCI: ◦ Amount of inventories recognised as expense in the period ◦ Amount of any write-down of inventories recognised as an expense during the period ◦ amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognised as expense in the period ◦ the circumstances or events that led to the reversal of a write- down of inventories

Disclosure SOPLOCI: Where profit or loss statement classified by nature, disclose: ◦ the costs recognised as an expense for raw materials and consumables, ◦ labour costs and ◦ other costs together with the amount of the net change in inventories for the period.