1. IAS 2: Inventories

2. 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).

3. 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

4. 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:

5. 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:

6. 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

7. 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

8. 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

9. 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?

10. 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

11. 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.

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

13. 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.

14. 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

15. Questions ?