IAS 2 Inventories
Definitions
Inventories are assets
- held for sale in the ordinary course of business
- in the process of production for such sale
- in the form of materials or supplies to be consumed in the production process or in the rendering of
services.
Net Realisable value
- Estimated selling price
- in the ordinary course of business
- less estimated cost of completion
- less estimated costs necessary to make the sale
- Thus an entity- specific value
Fair Value
- The price that would be received to sell an asset
- or would be paid to transfer a liability
- in an orderly transaction between market participants at the measurements date
- Thus a market specific value
Cost price
Cost of purchase (par 11)
- Purchase price, import duties, transport and handling
- Taxes not subsequently recoverable
- other cost directly attributable to the acquisition of finished goods materials and services
- trade discounts rebates and other similar items are deducted
Cost of conversion (par 12-14)
- Direct labour, production, overheads, indirect materials and labour
- fixed overheads based on normal capacity
- unallocated overheads are recognized as expenses
Other costs (par 15)
- Incurred in bringing inventories to present location and condition
General
If goods are returned, remember that one is not able to recover the import duties, shipping costs etc to
bring the inventories to its current condition- thus will only credit cost of the inventories with the
amount actually paid to the supplier to whom the goods are returned
Exclusions
Abnormal losses
Storage costs unless necessary for production Recognized as expenses
in period they incurred
Selling costs
Admin overheads not attributable
Under allocation of overheads
In perpetual and periodic the under allocation goes to Cost of Sales
Over allocation
The actual level of production may be used if it approximates normal capacity. (thus there may only be
an over- allocation if the actual production doesn’t exceed expected production materially)
, In periods of abnormally high production, the amount of fixed overhead allocated to each unit of
production is decreased so that inventories are not measured above cost. (Thus have to change the
allocation rate; the actual expenditure is then divided by the actual production and then multiplied by
actual production)
NRV
Measure at lower of cost and NRV
Example
Inventories 1000
NRV 800
Perpetual
- There is write down of 200
Dr Cost of sales 200
Cr Inventories 200
Periodic
- Closing balance already takes into account the write down
Dr Inventories 800
Cr Cost of sales 800
Item by item (par 29)
Example
PRODUCT COST NRV
A 5000 6000
B 1000 500
Measure at lower of cost or NRV
How much is the write down?
Firm sales contract (par 31)
- NRV is based on contract price
- Treat contract sales separate from normal sales if NRV is different
PRODUCT COST NRV
A 5000 ?
B 1000 500
¼ of product A was sold in terms of firm sales contract which stipulates the following
Discount of 10% is applicable
Delivery cost amounts to 100
Selling expenses are also ¼ of normal selling expenses
Total sales amounted to 7500 and Selling expenses are 600
Raw materials
Example
PRODUCT COST/UNIT UNITS ON HAND
RM 1 200 800
A 3000 1000
4 units of RM1 are used to produce 1 unit of A
RM1 can be sold for 80. Selling price of A is 2800
A
NRV = 2000
Write down= 3000 – 2800 = 200
Total = 1000 x 200 = 200 000
Definitions
Inventories are assets
- held for sale in the ordinary course of business
- in the process of production for such sale
- in the form of materials or supplies to be consumed in the production process or in the rendering of
services.
Net Realisable value
- Estimated selling price
- in the ordinary course of business
- less estimated cost of completion
- less estimated costs necessary to make the sale
- Thus an entity- specific value
Fair Value
- The price that would be received to sell an asset
- or would be paid to transfer a liability
- in an orderly transaction between market participants at the measurements date
- Thus a market specific value
Cost price
Cost of purchase (par 11)
- Purchase price, import duties, transport and handling
- Taxes not subsequently recoverable
- other cost directly attributable to the acquisition of finished goods materials and services
- trade discounts rebates and other similar items are deducted
Cost of conversion (par 12-14)
- Direct labour, production, overheads, indirect materials and labour
- fixed overheads based on normal capacity
- unallocated overheads are recognized as expenses
Other costs (par 15)
- Incurred in bringing inventories to present location and condition
General
If goods are returned, remember that one is not able to recover the import duties, shipping costs etc to
bring the inventories to its current condition- thus will only credit cost of the inventories with the
amount actually paid to the supplier to whom the goods are returned
Exclusions
Abnormal losses
Storage costs unless necessary for production Recognized as expenses
in period they incurred
Selling costs
Admin overheads not attributable
Under allocation of overheads
In perpetual and periodic the under allocation goes to Cost of Sales
Over allocation
The actual level of production may be used if it approximates normal capacity. (thus there may only be
an over- allocation if the actual production doesn’t exceed expected production materially)
, In periods of abnormally high production, the amount of fixed overhead allocated to each unit of
production is decreased so that inventories are not measured above cost. (Thus have to change the
allocation rate; the actual expenditure is then divided by the actual production and then multiplied by
actual production)
NRV
Measure at lower of cost and NRV
Example
Inventories 1000
NRV 800
Perpetual
- There is write down of 200
Dr Cost of sales 200
Cr Inventories 200
Periodic
- Closing balance already takes into account the write down
Dr Inventories 800
Cr Cost of sales 800
Item by item (par 29)
Example
PRODUCT COST NRV
A 5000 6000
B 1000 500
Measure at lower of cost or NRV
How much is the write down?
Firm sales contract (par 31)
- NRV is based on contract price
- Treat contract sales separate from normal sales if NRV is different
PRODUCT COST NRV
A 5000 ?
B 1000 500
¼ of product A was sold in terms of firm sales contract which stipulates the following
Discount of 10% is applicable
Delivery cost amounts to 100
Selling expenses are also ¼ of normal selling expenses
Total sales amounted to 7500 and Selling expenses are 600
Raw materials
Example
PRODUCT COST/UNIT UNITS ON HAND
RM 1 200 800
A 3000 1000
4 units of RM1 are used to produce 1 unit of A
RM1 can be sold for 80. Selling price of A is 2800
A
NRV = 2000
Write down= 3000 – 2800 = 200
Total = 1000 x 200 = 200 000
