IAS-2 Inventories-Students

 

IAS 2 Inventories

Overview IAS 2 sets out the accounng treatment for inventories, including the determinaon of cost, the subsequent recognion of an expense and any write-downs to net realisable value.

Scope Applies to all inventories except: - work in progress on construcon and service contracts (IAS 11); - nancial instruments (IAS 32 and IFRS 9); and - biological assets arising from agricultural acvity (IAS 41). Does not apply to the measurement of inventories in ventories held by: - producers of agricultural and forest products, and minerals and mineral products, that are measured at net realisable value in accordance with well-established pracces in those industries; and - commodity broker-traders who measure their inventories at fair value less costs to sell. Changes in the above inventory values are recognised in prot or loss in the period of the change.

Denions Inventories – Inventories  – assets that are: - held for sale in the ordinary course of business; - in the process of producon for such sale; or - in the form of materials or supplies suppl ies to be consumed in the producon process or in the rendering of services. Net realisable value (NRV) - the esmated selling price less the esmated costs of compleon and the esmated costs necessary to make the sale. Cost of inventories – all costs incurred in bringing the inventories to their present locaon and condion, including the costs of purchase and conversion. - Costs of purchase of inventories comprise the purchase p urchase price (less trade discounts, rebates and similar items), irrecoverable taxes, and transport, handling and other costs directly aributable to their acquision. - Costs of conversion include costs directly related to the units of producon, such as direct labour and systemacally allocated xed and variable producon overheads incurred in producing nished goods. Fair value – – the  the price that would be received to sell an asset or paid to transfer a liability in an orderly transacon between market parcipants at the measurement date.

 

Measurement  

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Inventories shall be stated at the lower of cost and net realisable value. To the extent that service providers have inventories, they measure them at the costs of  their producon. These costs are primarily the costs of labour directly engaged in providing the service, including supervisory personnel, and aributable overheads. The cost of inventories of items that are ordinarily interchangeable and have not been produced and segregated for specic projects is determined by using the rst-in, rstout (FIFO) or weighted average cost formula. The same cost formula shall be adopted for all inventories having a similar nature and use to the enty. Inventories are usually wrien down to NRV on an item by item basis, unless it is more appropriate to group similar or related items.

Recognion as an expense 

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When inventories are sold, the carrying amount of those inventories should be recognised as an expense in the period in which the related revenue is recognised. Any losses of inventories and the amount of any write-down to net realisable value shall be recognised as expense in the period in which the loss or write-down occurs. Any reversal of any write-down of inventories that resulted from an increase in the net realisable value shall be recognised as a reducon in the inventory expense in the period in which the reversal occurs.

Disclosure The following shall be disclosed in the nancial statements - the accounng policies for inventories - the total carrying amount of inventories and the carrying amount in classicaons appropriate to the enty - the carrying amount of inventories inven tories carried at fair value less ccosts osts to sell - the amount of inventories recognised as an expense during the period - the amount of any write-down of inventories recognised as an expense - the amount of any reversal of any write-down that is recognised as a reducon in the amount of inventories recognised as an expense - the circumstances or events that led to the reversal of a write-down of inventories - the carrying amount of inventories pledged as security for liabilies. Examples of costs excluded from the cost of inventories and recognized as an expense when they are incurred: Abnormal amounts of wasted materials, labour or other producon costs;  Storage costs, unless those costs are necessary in the producon process before a further producon stage;  Administrave overheads that do not contribute to bringing inventories to their present locaon and condion; and  Selling costs.

 

Example # 1 Lower of the cost or net realizable value (LCNRV)

Inventory at the end of the period Pr Prod oduc uctt A

10 Unit Unitss of Rs. Rs. 10 100 0 Each Each

= Rs. Rs. 10 1000 00

Pr Prod oduc uctt B

20 Unit Unitss of Rs Rs.. 15 150 0 each each

= Rs. Rs. 30 3000 00

Pr Prod oduc uctt C

15 Unit Unitss of Rs. Rs. 30 300 0 each each

= Rs. Rs. 45 4500 00 Rs.8500

Net Realizable Value = Market Price – Disposal Cost Pr Prod oduc uctt A

= Rs Rs.. 11 110 0 - Rs Rs.. 20 =Rs. =Rs. 90

Pr Prod oduc uctt B

= Rs Rs.. 17 170 0 - Rs Rs.. 10 =Rs. =Rs. 16 160 0

Pr Pro odu duct ct C

= Rs. Rs. 250 250 - Rs. Rs. 0 =R =Rs. s. 250 250

Lower of Cost or Net realizable value Cost

NRV

LCNRV

Product A

Rs. 100

Rs. 90

Rs. 90

Product B Product C

Rs. 150 Rs. 300

Rs. 160 Rs. 250

Rs. 150 Rs. 250

Value of Inventory at LCNRV Pr Pro odu duct ct A

10 Uni Units of Rs. Rs. 90 Each ach

= Rs. Rs. 900 900

Pr Prod oduc uctt B

20 Unit Unitss of Rs Rs.. 15 150 0 each each

= Rs. Rs. 30 3000 00

Pr Prod oduc uctt C

15 Unit Unitss of Rs. Rs. 25 250 0 each each

= Rs. Rs. 37 3750 50 Rs.7650

Reducon on Inventory = Rs.8500 -Rs. 7650 = Rs. 850 Accounng Treatment Cost of Goods Sold (Dr.) Inventory (Cr.)

Rs. 850 Rs. 850

OR

Loss Loss in In Inve vent ntor oryy (D (Dr. r.)) Rs. Rs. 85 850 0   Allowance to reduce Inventory (Cr.) Rs. 850

Example 2

An enty has work in process inventory. Till now the cost of $70,000 has been spent on this inventory. The esmated cost to convert the WIP inventory into nished goods is $48,000. The esmated selling price of inventory if sold in its present condion is $70,500 and if sold aer it has been converted to nished goods is $120,000. The enty has to pay 2% commission to its distributors. The enty does not sell the incomplete inventory. Required: Calculate NRV and explain at which amount the inventories should appear in Statement of Financial Posion.

 

Soluon:

Esmated selling price in ordinary course of business

120,000

Less: Esmated cost of compleon

(48,000)

Less: Esmated cost necessary to make the sale $120,000 x 2%

(2,400)

NRV

69,600

Cost

70,000

The amount at which inventories should appear in SFP (lower)

69,600

Example 3

You have a contract to supply 100 barrels of oil at $25 per barrel. The price is xed for the 6 months. At the end of the 1st month the market price of oil is $30. (The fair value is $30.) You buy the 100 barrels at the market price. Selling costs are $2 per barrel. Required: What is the NRV of inventories? 

Soluon:

The NRV of inventories is $23 per unit (i.e. $25 - $2). The total NRV is $23 x 100 units = $2,300

Example 4

The following data relates to inventory of King Limited: Parculars

Cost

NRV

 Rs  Rs.

Rs.

Material A

87,000

98,000

Material B

94,000

82,000

Total Raw Material Inventory

181,000

180,000

WIP AX

105,000

116,000

WIP BY

97,000

87,000

Total WIP Inventory

202,000

203,000

Product X

120,000

135,000

Product Y

105,000

102,000

Total Finished goods Inventory

225,000

237,000

Total Inventory

608,000

620,000

Required: Calculate the amount of write down to NRV, if required.

 

Soluon:

Parculars

Cost

NRV

Write down

 Rs.

Rs.

Rs.

Material A

87,000

98,000

0

Material B

94,000

82,000

12000

Total Raw Material Inventory

181,000

180,000

WIP AX

105,000

116,000

0

WIP BY

97,000

87,000

10000

Total WIP Inventory

202,000

203,000

Product X

120,000

135,000

0

Product Y

105,000

102,000

3000

Total Finished goods Inventory

225,000

237,000

25000

Total Inventory

608,000

620,000

Example # 5

During the night of 15th December 2004, ood water entered in the warehouse of Fine Distributors and destroyed the enre inventory. Certain informaon relang to the period from 1 st July to 14th December, 2004 is however, available at the Sales Oce of the company. Rupees Gross sales

9,625,000

Opening inventories

1,250,000

Gross purchases

8,250,000

Un-recorded sales

625,000

Sales return

1,250,000

Purchase return

375,000

Freight on purchase

1,250,000

Mark up on cost

20%

Required: Calculate the Cost of Inventories, for which the company should lodge an insurance claim.

Soluon:

Opening stock

1,250,000

Purchases (Note-1)

9,125,000

Cost of sales (Note-2)

(7,500,000)

Amount of insurance claim / loss caused by re

2,875,000

Notes

 

1. Purchases 8,250,000 – 375,000 +1,250,000 = 9,125,000 2. Cost of sales (9,625,000 + 625,000 – 1,250,000) x 100/120 = 7,500,000 Example # 6

Aqeel Limited is engaged in the producon of fountain pens. At the year end, the company owns the following inventory. Item # K300i K500i

Units 300 200

Cost per unit (Rs.) 100 5000

NRV per unit (Rs.) 80 6000

K700i J200i C100 C110 C200 N500 N600

100 400 400 900 1000 50 200

4500 300 400 600 50 100 50

4000 400 410 500 55 95 40

Required: You are required to calculate the amount of inventory by aggregate by category basis.

Soluon:

Items #

Units

K300i K500i K700i

300 200 100

Cost Per Unit Rs. 100 5000 4500

NRV per unit Rs. 80 6000 4000

J200i

400

300

400

C100 C110 C200

400 900 1000

400 600 50

410 500 55

N500 N600

50 200

Value of Inventory

100 50

95 40

Total Cost Rs.

Total NRV Rs.

30,000 1,000,000 450,000 1,480,000 120,000

24,000 1,200,000 400,000 1,624,000 160,000

160,000 540,000 50,000 750,000 5,000 10,000 15,000

164,000 450,000 55,000 669,000 4,750 8,000 12,750

Lower of Cost & NRV Rs.

1,480,000 120,000

669,000

12,750 2,281,750

 

Pracce Problems: Problem 1

From the data given below, compute the value of inventory in hand (800 units) in accordance with the requirements of IAS 2. Rs. Invoice price (including sales tax) - 1000 units

11,150

Cost of material

8,250

Income Tax paid at import stage

800

Custom duty

600

Sales Tax (refundable)

2,000

Transport charges

500

Material handling charges

400

Store rent

300

Discounts allowed

250

Indirect labour

200

Variable overhead

130

Depreciaon

520

Selling expenses

220

Maintenance of factory equipment

300

Designing charges

550

Material wasted

250

Problem 2

Azhar and Company are importers of a parcular item. Accountant of the company has prepared the Prot and Loss Account following average method for valuaon of closing inventory. Following are the details of transacons during the year: Date Opening inventory Purchases

Sales

Quanty

Amount in Rupees

1,000 05-07-2002

5,000

3,250,000

10-09-2002

14,000

8,750,000

26-12-2002

9,500

6,650,000

24-03-2003

18,600

13,857,000

05-04-2003

15,600

11,310,000

31-05-2 3105-2003 003

10,100 10,100

6,969, 6,969,000 000

57,000

 

Closing inventory

16,800

The Prot and Loss Account prepared by the Accountant on average method of valuaon of closing inventory is as follows: Prot and loss Account 

Rs.

Rs.

Sales

41,325,000

Cost of sales Opening inventory

560,000

Purchases

50,786,000 51,346,000

Less: Closing inventory

11,688,250

 

39,657,480

Gross Prot

1,667,520

Operang and selling expenses

1,525,900

Net prot

141,620

Required: Prepare a revised Prot & Loss Account based on FIFO method for valuaon of closing inventory at cost or net realizable value whichever is lower. The selling expenses are 2% of sales. Problem 3:

Kidz Party & Co. (KPC) manufactures and sells toys. Following informaon is available regarding four of its inventory items as on 31 December 2017: Items

Units

Cost per unit (Rs.)

Toy cars Doll houses Stued toys

10,000 5,000 1,850

1,250 1,800 1,200

Normal selling price per unit (Rs.) 1,200 2,700 1,900

Minion costumes

870

1,500

2,500

Following informaon is also available: (i) (ii) (ii) (iii) (iii)

(iv (iv))

A sale saless orde orderr ffor or 3,000 3,000 toy cars cars @ Rs. 1,100 1,100 per per unit unit is in hand. hand. The The remain remaining ing units units can be sold at normal selling price aer incurring selling cost of Rs. 150 per unit. Doll Doll h hous ouses es incl include ude 1,000 1,000 defec defecve ve un units its wit with h no no sscrap crap value. value. 20% of tthe he rema remaini ining ng doll doll houses are damaged and can be sold at 50% of cost. c ost. Stued Stued toys toys cosn cosng g Rs Rs.. 420,00 420,000 0 were were accid accident entall allyy damag damaged ed and and are are beyo beyond nd repa repair. ir. KPC KPC plans to sell these toys as scrap. Proceeds from such sale are esmated at Rs. 175,000 and the sale would require transportaon cost of Rs. 6,300. All minion minion costum costumes es have have manu manufac factur turing ing ffaul aults ts an and d can be sold sold in in presen presentt condi condion on at Rs. 1,350 per unit. However, 60% of the units can be reced at a cost of Rs. 200 per unit aer which they can be sold at Rs. 1,600 per unit.

Required: Calculate the amount at which above inventory items should be carried as on 31 December 2017 in accordance with IAS 2 ‘Inventories’.