IAS 2 Inventory

1. IAS 2 Inventory

2. IAS 2 does not apply to • Work in progress arising under construction contracts including directly related service contracts • Financial instruments • Biological assets relating to agricultural activity and agricultural product at the point of harvest • Producers of agricultural and forest products, minerals and mining products etc • Commodity broker – traders that measure their inventories at fair value less selling costs These are all covered under specific standards.

3. Definition of Inventory • Held for sale in the ordinary course of business • In the process of production for such sale (WIP) • In the form of materials or supplies to be consumed in the production process or the rendering of services.

4. Valuation of Inventory • Physical Inventory Count at end of year – guarantees correct quantities • Impacts on profits and tax liability in the Statement of Profit & Loss • Strengthens the position of the Statement of Financial Position

5. The larger the closing inventory the smaller the cost of sales, the larger the gross profit • If a company could manipulate the value of closing inventory, it could influence profit figures and tax liabilities • Different types of inventory require different treatments. Eg specialist products, custom built items, products that mature in value over time, products that are work in progress etc • IAS 2 was introduced to provide clarity

6. Fundamental Principle • Inventory valued at the lower of Cost or NRV • Prudence – not to overstate/understate the assets

7. Definition of NRV • NET Realisable Value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated cost of sale.

8. NRV greater than Cost but… • NRV may be lower if… • Damaged • Obsolete • Change in market demand • Physical deterioration

9. Calculate NRV • Sale Price • further costs that may be incurred to complete the production of the item • costs to sell and distribute the item

10. Calculating Cost • Costs of purchase including tax, import duty, transport and handling – trade discount + Cost of conversion including fixed and variable overheads + other costs incurred in bringing the inventories to their present location and condition

11. Excluded from Cost • Abnormal waste or spoilage • Factory Idle time • Storage costs – except when necessary in the production process before a production stage. This implies that storage costs of raw materials and finished goods are excluded. • General administration overheads • Marketing and other sales costs.

12. Measurement • Actual unit cost • FIFO • Weighted average costs • Standard cost • Retail method

13. Measurement • Actual unit cost • FIFO • Weighted average costs • Standard cost • Retail method • Actual Unit Cost Cost of each item valued individually by including all costs incurred to bring it to its present location and condition. Usually only feasible for high-valued, low-quantity inventory eg Car dealership

14. Measurement • Actual unit cost • FIFO • Weighted average costs • Standard cost • Retail method • First In First Out Inventory is made up of the latest purchases. LIFO method banned.

15. Measurement • Actual unit cost • FIFO • Weighted average costs • Standard cost • Retail method • Weighted Average Weighted average purchase price over the year used to value closing inventory

16. Measurement • Actual unit cost • FIFO • Weighted average costs • Standard cost • Retail method • Standard Cost Standard costs reviewed frequently to ensure that they bear a reasonable relationship to actual costs during the period

17. Measurement • Actual unit cost • FIFO • Weighted average costs • Standard cost • Retail method • Retail Method Used in retail for measuring large quantity of inventory with similar margins that are rapidly changing. Cost determined by using a reduced sale value.

18. Write down of inventory to NRV • Where the cost of inventories may not be recoverable e.g. goods are damaged, obsolete or selling prices declined etc. then inventories are written down to value expected to be realised from their sale or use. • Inventories are usually written down to NRV on an item by item basis. • Losses associated with write down are an expense in the period of the write down

19. Reversal of Write Down • Increase in NRV - Expense “Reversal of Write Down”

20. Disclosure The financial statements should disclose the following: a) The accounting policies adopting in measuring inventories, including cost formulas. b) The total carrying amount of inventories broken into appropriate classifications c) The carrying amount at fair value less costs to date d) The amount expended in the period e) The amount of any writedowns of inventories f) The amount of any reversal of any writedowns. g) The circumstances or events that led to the writedown(s). h) The carrying amount of inventories pledged as security for liabilities Common classifications include retail merchandise, production supplies, materials, work in progress and finished goods.

21. Q1 • Inventories should be valued at the lower of Cost or NRV

22. Q2 • Stock cost 60,000 • NRV 40,000 • 40,000 x 2.5% = 1,000 • Write down = 20,000 + 1,000 = 21,000

23. Q3 • The following costs cannot be included as part of the cost of inventory: • Selling costs

24. Q4 • + receivables 55,000 • + sales 50,000 • + VAT 5,000 • + Expense 45,000 • - CA inventory 45,000

25. Q5 • Write down 300,000 • 300,000 x 50% = 150,000 Insurance receivable CA • Recoverable value

26. Q6 • + receivables 50 x 280 • + sales 50 x 280 • 700 x 280 = 196,000 • 750 x 300 = 225,000 Adjustment 29,000 • + expense • - CA inventory

27. Q7

28. Q9

29. Q10 • IAS 2 states that inventory be measured as the lower of cost or Net Realisable Value • Cost = cost of purchase and cost of conversion • NRV = actual or estimated selling price less and further costs of conversion