1. Inventories: IAS 2

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3. 3 Inventories Related standards Related standards IAS 2 IAS 2 Current GAAP comparisons Current GAAP comparisons IFRS financial statement disclosures IFRS financial statement disclosures Looking ahead Looking ahead End-of-chapter practice End-of-chapter practice

4. 4 Related Standards HB 3031 Inventories HB 3031 Inventories

5. 5 Related Standards FAS 151 Inventory costs—an amendment of ARB 43 FAS 151 Inventory costs—an amendment of ARB 43 ARB 43 Inventories ARB 43 Inventories

6. 6 Related Standards IAS 11 Construction contracts IAS 11 Construction contracts IAS 32 Financial instruments: presentation IAS 32 Financial instruments: presentation IAS 39 Financial instruments: recognition and measurement IAS 39 Financial instruments: recognition and measurement IAS 41 Agriculture IAS 41 Agriculture

7. 7 IAS 2 - Overview Objective and scope Objective and scope Measurement Measurement Expense recognition Expense recognition Disclosure Disclosure

8. 8 IAS 2 - Objective and Scope Standards for what costs are recognized as inventory costs and when these costs are transferred to the income statement as expense Standards for what costs are recognized as inventory costs and when these costs are transferred to the income statement as expense IAS 2 excludes construction work-in- progress, inventories of financial instruments, and biological inventory assets related to agricultural activity and agricultural products at the point of harvest IAS 2 excludes construction work-in- progress, inventories of financial instruments, and biological inventory assets related to agricultural activity and agricultural products at the point of harvest

9. 9 IAS 2 - Objective and Scope Inventories are assets: (a) held for sale in the ordinary course of business (b) in the process of production for such sale, or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services

10. 10 IAS 2 - Measurement Inventories are measured at the lower of cost and net realizable value (LC and NRV) Inventories are measured at the lower of cost and net realizable value (LC and NRV) Need to know: Need to know: - what costs are included - what cost formulas are permitted - how net realizable value is determined

11. 11 IAS 2 - Measurement Costs included: Costs included: 1. Purchase costs 2. Conversion costs 3. Other inventoriable costs

12. 12 IAS 2 - Measurement Purchase costs Purchase costs - purchase price and all costs directly attributable to their acquisition such as non-refundable taxes, transportation and handling, reduced by volume discounts and rebates

13. 13 IAS 2 - Measurement Conversion costs Conversion costs - direct labour, indirect variable and fixed production overhead costs - variable production overhead: allocate to inventory based on actual usage - fixed production overhead: allocate to production based on normal operating capacity (except when abnormally high production)

14. 14 IAS 2 - Measurement Joint products Joint products - Allocate between products on a rational basis such as relative sales value of products when they become separable - If minor in value, do not allocate: measure by-product at net realizable value and deduct this amount from main product costs

15. 15 IAS 2 - Measurement Other inventoriable costs Other inventoriable costs - limited to costs to bring the inventories to their present location and condition - example: amortization of capitalized development costs related to inventory - borrowing costs included if for a qualifying inventory item (if measured at FV or produced in large volumes on a repetitive basis, borrowing costs may, but are not required to be capitalized)

16. 16 IAS 2 - Measurement Do not add to inventory cost: Costs of abnormal waste Costs of abnormal waste Storage or warehousing costs unless necessary for next stage of production Storage or warehousing costs unless necessary for next stage of production Administrative overheads not associated with production Administrative overheads not associated with production Selling costs Selling costs Financing charges above purchase price for normal credit terms Financing charges above purchase price for normal credit terms

17. 17 IAS 2 - Measurement Cost formulas permitted should: Cost formulas permitted should: - Assign recent costs to ending inventory - Correspond closely with the actual physical flow of the goods and services - Three permitted: Specific identification, First-in, first-out, and weighted average

18. 18 IAS 2 - Measurement Specific identification: For inventory items that are not ordinarily interchangeable For inventory items that are not ordinarily interchangeable For goods and services produced and segregated for specific projects For goods and services produced and segregated for specific projects

19. 19 IAS 2 - Measurement FIFO and weighted average: FIFO – cost of latest purchases ends up in cost of ending inventory, cost of earliest purchases are in cost of goods sold FIFO – cost of latest purchases ends up in cost of ending inventory, cost of earliest purchases are in cost of goods sold Weighted average – weighted average cost of all goods available for sale ends up in both ending inventory and cost of goods sold Weighted average – weighted average cost of all goods available for sale ends up in both ending inventory and cost of goods sold

20. 20 IAS 2 - Measurement KPMG : The Application of IFRS: Choices in Practice – International Financial in Practice – International Financial Reporting Standards, December Reporting Standards, December 2006 2006 Results indicate that the usage of the FIFO and weighted average methods are fairly evenly split by companies reporting under IFRS

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22. 22 IAS 2 - Measurement Inventories reported at the LC and NRV Inventories reported at the LC and NRV Why? So not reported at more than the future cash flows into the company from their sale Why? So not reported at more than the future cash flows into the company from their sale NRV = the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs to make the sale NRV = the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs to make the sale

23. 23 IAS 2 - Measurement LC and NRV example: CostRs 80 CostRs 80 Selling priceRs 84 Selling priceRs 84 Cost to completeRs 5 Cost to completeRs 5 Cost to sell 10% of SP Cost to sell 10% of SP NRV: Rs84 - Rs5 - Rs8.40 =Rs70.60 LC and NRV =Rs70.60

24. 24 IAS 2 - Measurement Write-downs are recognized in profit or loss. Write-downs are recognized in profit or loss. Subsequent write-ups permitted to maximum of prior write-downs if: Subsequent write-ups permitted to maximum of prior write-downs if: - changed economic circumstances and NRV has increased, prior situation no longer exists Reversals also taken to profit or loss Reversals also taken to profit or loss

25. 25 IAS 2 – Expense Recognition Carrying amount of inventory sold is expense in same period as the related revenue Carrying amount of inventory sold is expense in same period as the related revenue Inventory adjustments (losses, write- downs to lower of cost and NRV, write- down reversals, etc.) are recognized as an adjustment to the expense recognized in the period Inventory adjustments (losses, write- downs to lower of cost and NRV, write- down reversals, etc.) are recognized as an adjustment to the expense recognized in the period

26. 26 IAS 2 - Disclosure Disclosures needed for: Accounting policies applied Accounting policies applied Inventory remaining on statement of financial position Inventory remaining on statement of financial position Inventory costs recognized in profit or loss Inventory costs recognized in profit or loss

27. 27 IAS 2 - Disclosure Balance-sheet related disclosures: Carrying amount in each category of inventory (materials, WIP, finished goods, production supplies, merchandise) and in total Carrying amount in each category of inventory (materials, WIP, finished goods, production supplies, merchandise) and in total Carrying amount of any inventory measured at fair value less costs to sell Carrying amount of any inventory measured at fair value less costs to sell Carrying amount of inventory pledged as collateral for liabilities Carrying amount of inventory pledged as collateral for liabilities

28. 28 IAS 2 - Disclosure Income statement-related disclosures: Amount of inventory recognized as an expense (usually cost of sales/cost of goods sold) Amount of inventory recognized as an expense (usually cost of sales/cost of goods sold) Amount of write-downs to NRV or other losses Amount of write-downs to NRV or other losses Amount of any write-down reversals Amount of any write-down reversals Circumstances that resulted in reversals Circumstances that resulted in reversals

29. 29 Looking Ahead There is nothing on the IASB’s current agenda that directly involves potential changes to IAS 2 Inventories There is nothing on the IASB’s current agenda that directly involves potential changes to IAS 2 Inventories

30. 30 End-of-Chapter Practice

31. 31 End-of-Chapter Practice

32. 32 End-of-Chapter Practice

33. 33 End-of-Chapter Practice

34. 34 End-of-Chapter Practice

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