1. LACPA IFRS Presentation
Inventories IAS 2
LACPA
IFRS Presentation

2. 1. Introduction – definitions
Overview of session
1. Introduction – definitions
2. Measurement
3. Recognition
4. Disclosure
5. Questions

3. 1. Introduction – definitions
Inventories
1. Introduction – definitions

4. Definitions Inventories 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
An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

5. Inventories
2. Measurement

6. Inventories are stated at the lower of cost of and net
Measurement
Inventories are stated at the
lower of cost of and net
realisable value.

7. Cost
Cost of Production:
Cost of
Purchase
Other
Costs
Conversion

8. Cost components Cost of purchase comprises purchase price
import duties
transport and handling costs
any other directly attributable costs
less trade discounts, rebates and subsidies
may include foreign exchange differences, which arise directly on acquisition of inventories invoiced in a foreign currency (refer IAS 21)

9. Cost components Cost of conversion comprises:
Costs, which are specifically attributable to units of production, that is direct labour, direct expenses and sub-contracted work.
Production overheads: overheads incurred in respect of materials, labour or services for production, based on the normal level of activity, taking one year with another.

10. Cost components
Other costs may include overheads, attributable in the particular circumstances of the business to bringing the product or service to its present location and condition, e.g. design costs.
Excluded costs: Usually selling expenses, general administrative overheads, research and development costs and interest costs are not considered to relate to putting the inventories in their present location and condition.

11. Cost Formulae
Specify the components attributable to the cost of inventory
Cost formulae:
First in First Out (FIFO) formula
Weighted Average Cost formula
Prohibited Treatment:
Last in First Out (LIFO) formula
Consistency required across each type of inventory:

12. Cost Formulae
FIFO: the calculation of the cost of inventories on the basis that quantities on hand represent the latest purchases or production. This method assumes that the oldest inventories are used up first.
Weighted average cost: the calculation of inventories by using an average price computed by dividing the total cost of units by the total number of such items.
An entity needs to use the same cost formula for all inventories of a similar nature and use to the entity

13. Cost components
Which of the above cost categories do the following costs belong to?
Cost
Cost Category
Selling costs
Direct labour
Design of finished goods
Import duties on raw material
Fixed production overhead
Purchase of raw material
Abnormal amounts of wasted material

14. Cost components Answer Cost Cost Category Selling costs Excluded
Direct labour
Cost of conversion
Design of finished goods
Other costs
Import duties on raw material
Cost of purchase
Fixed production overhead
Purchase of raw material
Abnormal amounts of wasted material

15. Cost Formulae Question:
ABC trades in chocolates and made the following purchases and sales in the period. There are 10 units left at balance sheet date. Calculate the cost of stock using FIFO and weighted average cost formulae
Transaction
Period
Quantity
Price
Total
WAC
Purchase
June
3 units
$ 20
$ 60
July
7 units
$ 30
$ 210
Sale
August
4 units
September
$ 40
$160

16. Cost Formulae
Answer:
FIFO: 4 at $40 plus 6 at $30 = 160 plus 180 = $ 340
Weighted average:
Transaction
Period
Quantity
Price
Total
WAC
Purchase
June
3 units
$20
$60
July
7 units
$30
$210
Remaining
10 units
$270
$27.0
Sale
August
4 units
6 units
$162
September
$ 40
$160
$322
$32.2

17. Net realisable value
Measured at lower of : Cost and Net Realisable Value
Net Realisable Value The estimated selling price in the ordinary course of business less the estimated costs of completion and estimated costs necessary to make the sale
Selling Price X
Trade Discounts (X)
Costs to Completion (X)
Marketing, Selling and Distribution Costs (X)
Net Realisable Value X

18. Cost vs. NRV calculation

19. Inventories
3. Recognition

20. What are the Dr and Cr involved in a sale of inventory?
Recognition
Inventory is a current asset
Inventory is expensed… …when the related revenue is recognised
The expense of a write down to NRV is recognised… …when the write down occurs
What are the Dr and Cr involved in a sale of inventory?

21. Recognition Inventory: Dr Cost of Sales 100 Cr Inventory 100 Sale:
Dr Cash 150
Cr Sales 150
Write-down to NRV
Dr Profit and Loss – Inventory write down
Cr Inventory

22. Inventories
4. Disclosures

23. Disclosures
Accounting policy
Balance Sheet
Income Statement

24. Disclosures Accounting policy: Balance Sheet Income Statement
identify cost formula used (FIFO or weighted average)
Cost components
Valuation (lower of cost or NRV)
Balance Sheet
Carrying amount of inventories (on face of BS)
Analyse inventories by classification (e.g. raw materials, finished goods etc…)
Income Statement
Cost of inventories expensed in period
Expense of inventory write-downs included under other operating expenses

25. Inventories
5. Questions