1. INVENTORY VALUATION
THEORY AND PRACTICE

2. In theory inventory (stock and work in in progress) can be valued using either of the following valuation bases
Output valuation models
Input valuation models

3. INVENTORY VALUATION BASES OUTPUT VALUE MODELS
Income reporting
When applicable
Discounted money receipts
All revenues reported except interest
Sale price known and timing of cash receipts known
Current selling price
All revenues and gains and losses included
Sale price known and collection period short
Net realisable value
All net revenue reported
Sale price known and costs of disposal known or predictable

4. INVENTORY VALUATION BASES INPUT VALUE MODELS (1)
Income reporting
When applicable
Historical cost
No recognition of operating revenue or gains and losses from changes in specific prices until time of sale
Revenue not yet earned and sale price uncertain
Current replacement cost
Gains and losses from specific price changes included in income but operating revenue not included until time of sale
Revenue not yet earned, sale price uncertain, and current costs can be measured objectively

5. INVENTORY VALUATION BASES INPUT VALUE MODELS (2)
Income reporting
When applicable
Standard cost
Income includes abnormal gains and losses arising from inefficiency or idle capacity but operating revenue not included until time of sale
Reflects current production cost under efficient and normal conditions
Normal (base) stock valuation
No recognition of gains and losses from specific price changes relating to base stock
Theoretically acceptable for income - distorts inventory valuation

6. INVENTORY VALUATION BASES INPUT VALUE MODELS (3)
Income reporting
When applicable
Net realisable value less a normal profit margin
All value changes included in income but with deferral of normal gross profit
An approximation to replacement cost or as a minimum valuation when above replacement cost - not recommended
Lower of cost or market value
Income includes losses but not gains from specific price changes, operating revenue reported at time of sale
Acceptable but little justification in Accounting Theory

7. Fundamental Accounting Concepts
going concern
accruals
consistency
materiality
prudence

8. No area of accounting has produced wider differences in practice than the computation of the amount at which inventories and work in progress are stated in financial accounts
IAS 2 seeks to define the practices, to narrow the differences and variations in those practices and to ensure adequate disclosure in the financial statements

9. IAS 2 - OBJECTIVES
to narrow the difference and variation in accounting practice on stocks and work in progress
to ensure adequate disclosure in the financial accounts

10. INVENTORY AND WORK IN PROGRESS COMPRISE
goods purchased for resale
consumable stores
materials purchased for manufacture into products for sale
products and services in the course of completion
finished goods

11. Inventory should be valued at the lower of cost and net realisable value
Expenditure incurred in the normal course of business in bringing the product or service to its present location and condition. Cost will include direct costs, production overheads, and any other attributable overheads
Net realisable value:
The estimated selling price less all costs to completion and all costs relating to the sale of the product

12. INVENTORY VALUATION BASES
unit cost - the cost of identifiable units of stock
average cost - total cost divided by the number of units
FIFO - first in first out
LIFO - last in first out

13. INVENTORY VALUATION BASES
base stock - a predetermined fixed base level
standard cost - based on predetermined costs
replacement cost - cost of an identical item
current cost - lower of replacement cost and net realisable value

14. DISCLOSURE RE INVENTORY
raw materials and consumables
work in progress
finished goods and goods for resale
payments on account

15. IAS 2 DISCLOSURE
The total of the lower of cost and net realisable value of the separate items of stock, or of groups of similar items, should be sub-classified in the balance sheet or in the notes to the financial statements so as to indicate the amounts held in each of the main categories in the standard balance sheet formats

16. IAS 2 FIFO weighted average any other similar method
overheads to be included
absorption costing

17. LONG-TERM CONTRACT WORK IN PROGRESS
IAS 11
LONG-TERM CONTRACT WORK IN PROGRESS

18. LONG-TERM CONTRACT
A contract to create a single substantial asset, service, or combination of asset and service, where a substantial proportion of the contract work will extend over a period in excess of one year

19. THE PROBLEM
To determine the most appropriate method to allocate the contract profit over the term of the contract

20. ATTRIBUTABLE PROFIT
That part of the total profit currently estimated to arise over the period of the contract (taking into account likely irrecoverable cost increases and estimated remedial and maintenance costs) which fairly reflects the profit attributable to the part of the work performed at the accounting date. Profit cannot be regarded as attributable until the outcome of the contract can be assessed with reasonable certainty

21. ATTRIBUTABLE PROFIT - THE MAIN ISSUES
taking into account likely irrecoverable cost increases
taking into account estimated remedial and maintenance costs
the profit attributable to the part of the work performed at the accounting date must be fairly reflected
the outcome of the contract can be assessed with reasonable certainty

22. FORESEEABLE LOSSES
Losses which are currently estimated to arise over the duration of the contract allowing for remedial and maintenance costs and any likely irrecoverable cost increases

23. FORSEEABLE LOSSES - THE MAIN ISSUES
estimated to arise over the duration of the contract
taking into account likely irrecoverable cost increases
taking into account estimated remedial and maintenance costs
must be accounted for as soon as the losses become apparent

24. PERCENTAGE OF COMPLETION METHOD (1)
ATTRIBUTABLE PROFIT
PERCENTAGE OF COMPLETION METHOD (1)

25. PERCENTAGE OF COMPLETION METHOD (2)
ATTRIBUTABLE PROFIT
PERCENTAGE OF COMPLETION METHOD (2)

26. ATTRIBUTABLE PROFIT ESTIMATED VALUE METHOD
Estimated value of work to date less cost of work to date (does not take into account estimated total profit)

27. Profits are not recognised until the contract has been completed
ATTRIBUTABLE PROFIT
COMPLETED CONTRACTS METHOD
Profits are not recognised until the contract has been completed

28. CONTRACT DISCLOSURE should be assessed on a contract by contract basis
turnover and related costs to be included in income statement as contract progresses
where the outcome of the contract can be assessed with reasonable certainty the recognised attributable profit will be the difference between recorded turnover and recorded costs
where the amount recorded as turnover exceeds payments received on account the difference should be reported in the balance sheet as a debtor “amounts recoverable on contracts”

29. CONTRACT DISCLOSURE
any costs incurred, but not yet recorded as costs in the income statement, should be included as stocks in the balance sheet
the amount by which payments received on account exceed the amount recorded as turnover should be recorded in the balance sheet as a reduction from stocks
the amount by which payments received on account exceed the amount recorded as turnover and stocks should be reported in the Balance Sheet as a creditor “payments on account”

30. CONTRACT DISCLOSURE
any foreseeable losses should be charged to the income statement and deducted from the balance sheet stocks value
the amount by which foreseeable losses exceed the stocks value of the contract should be recorded in the balance sheet as a provision
in all cases attributable profit and foreseeable losses will be taken into account after allowing for estimated remedial and maintenance costs