IAS 2 Inventories PDF

SUMMARY IAS 2 Inventories Overview IAS 2 sets out the accounting treatment for inventories, including the determination of cost, the subsequent recognition of an expense and any write-downs to net realisable value. Scope  Applies to all inventories except: - work in progress on constructio...

SUMMARY IAS 2 Inventories Overview IAS 2 sets out the accounting treatment for inventories, including the determination of cost, the subsequent recognition of an expense and any write-downs to net realisable value. Scope  Applies to all inventories except: - work in progress on construction and service contracts (IAS 11); - financial instruments (IAS 32 and IFRS 9); and - biological assets arising from agricultural activity (IAS 41).  Does not apply to the measurement of inventories 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 practices 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 profit or loss in the period of the change. Definitions  Inventories – assets that are: - 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.  Net realisable value (NRV) - the estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale.  Cost of inventories – all costs incurred in bringing the inventories to their present location and condition, including the costs of purchase and conversion. - Costs of purchase of inventories comprise the purchase price (less trade discounts, rebates and similar items), irrecoverable taxes, and transport, handling and other costs directly attributable to their acquisition. - Costs of conversion include costs directly related to the units of production, such as direct labour and systematically allocated fixed and variable production overheads incurred in producing finished goods. 1  Fair value – the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Measurement  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 production. These costs are primarily the costs of labour directly engaged in providing the service, including supervisory personnel, and attributable overheads.  The cost of inventories of items that are ordinarily interchangeable and have not been produced and segregated for specific projects is determined by using the first-in, first-out (FIFO) or weighted average cost formula. The same cost formula shall be adopted for all inventories having a similar nature and use to the entity.  Inventories are usually written down to NRV on an item by item basis, unless it is more appropriate to group similar or related items. Recognition as an expense  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 reduction in the inventory expense in the period in which the reversal occurs. Disclosure  The following shall be disclosed in the financial statements - the accounting policies for inventories - the total carrying amount of inventories and the carrying amount in classifications appropriate to the entity - the carrying amount of inventories carried at fair value less costs to sell - the amount of inventories recognised as an expense during the period 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 production costs;  Storage costs, unless those costs are necessary in the production process before a further production stage;  Administrative overheads that do not contribute to bringing inventories to their present location and condition; and  Selling costs. - 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 reduction 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 liabilities. IAS 2 Inventories 2  MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas LESSON 6: ACCOUNTING REGULATIONS RELATING TO INTERNAL ACCOUNTING Departamento de Contabilidad y Gestión UNIVERSIDAD DE MÁLAGA LESSON 6: ACCOUNTING REGULATIONS RELATING TO INTERNAL ACCOUNTING Versión 1.0 Septiembre de 2018 © Mariano Soler Porta I Plan Propio Integral de Docencia. Universidad de Málaga MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas © Mariano Soler Porta - Dpto. Contabilidad y Gestión - Universidad de Málaga 2 LESSON 6: ACCOUNTING REGULATIONS RELATING TO INTERNAL ACCOUNTING 1 BACKGROUND: GROUP 9 OF THE PGC OF 1973 IN GENERAL ACCOUNTING PLAN OF 1973: Develops internal accounting through Group 9. Analytical Accounting published in 1978. The application of Group 9 was always voluntary. IN GENERAL ACCOUNTING PLAN OF 1990 AND 2007 (The latter in force since 01/01/2008): They do not develop the internal accounting (In the PGC of 2007 the G-9 dedicates it to Income directly attributable to the Net Worth). It has never existed for companies in spain the obligation to develop internal accounting or do it on the basis of an established legislation, but if there are external environmental standards related to the internal scope, both at national and international levels. 2 INTERNATIONAL NORMS (IAS 2) In the International sphere, the regulations related to Management Accounting are found in AIS 2 "Inventories". (Effective January 1, 2005) This IAS / IFRS standard affects us as a full member of the EU IAS.-International Accounting Standards IFRS.- International Financial Reporting Standards. OBJETIVE: The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for subsequently recognising an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. Inventories will be valued at the lower of: the cost or net realizable value, whichever is less". MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas © Mariano Soler Porta - Dpto. Contabilidad y Gestión - Universidad de Málaga 3 LESSON 6: ACCOUNTING REGULATIONS RELATING TO INTERNAL ACCOUNTING The cost of the Stocks. It will include all the costs derived from their acquisition Cost and Production Cost, as well as other costs incurred to give them their current condition and location. As a result of the above, we can distinguish two types of costs: MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas © Mariano Soler Porta - Dpto. Contabilidad y Gestión - Universidad de Málaga 4 LESSON 6: ACCOUNTING REGULATIONS RELATING TO INTERNAL ACCOUNTING COSTS EXCLUDED FROM THE PRODUCT:  Abnormal amounts of waste materials, labor or other production costs.  Storage costs (P.A), unless they are necessary in the production process, prior to a subsequent elaboration process.  The indirect costs of administration that have not contributed to give inventories their current condition and location.  The costs of sale.  Interest costs, IAS 23 identifies the limited circumstances in which financial costs are included in the cost of inventories (Non-production related). In addition, IAS 2 deals with: JOINT PRODUCTION: It uses the same calculation methods studied in Lesson 4. "Method of distribution" "Subtraction method" "Method of recovery” THE INVENTORY COSTS FOR A SERVICE PROVIDER: The services are valued for the costs involved in their production. Mainly labor and other costs of personnel directly involved in the provision of the service, including supervisory personnel and other indirect attributable costs (eg electricity, telephone, etc.). The costs related to sales and general administration are not included but go directly to the profit and loss account. VALUATION OF STOCKS: The identifiable products are valued in inventory through the specific identification of their individual costs. The products that can not be identifiable with each other, will be assigned using the FIFO or Weighted Average Cost methods. MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas © Mariano Soler Porta - Dpto. Contabilidad y Gestión - Universidad de Málaga 5 LESSON 6: ACCOUNTING REGULATIONS RELATING TO INTERNAL ACCOUNTING 3 NATIONAL NORMS At the National level, the existing regulations related to Management Accounting are found in the RESOLUCIÓN DE 14 DE ABRIL DE 2015 DEL ICAC -Instituto de Contabilidad y Auditoría de cuentas (RICAC) (BOE 23/04/2015)- POR LA QUE SE ESTABLECEN CRITERIOS PARA LA DETERMINACIÓN DEL COSTE DE PRODUCCIÓN (sustituye a la Resolución de 9 de mayo de 2000) OBJETIVE: To establish norms for the determination of the cost of production of the stocks, understanding as such both the goods produced and the services provided by the company. Likewise, it will also be applicable for the determination of the cost of production of the elements of the fixed assets manufactured or built by the company. COSTS EXCLUDED FROM THE PRODUCT: they are directly imputed to the result of the year  Marketing expenses.  Expenses after the sale of the product due to sales returns, repair guarantees, reviews and other analogous items.  General expenses of administration or company management. MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas © Mariano Soler Porta - Dpto. Contabilidad y Gestión - Universidad de Málaga 6 LESSON 6: ACCOUNTING REGULATIONS RELATING TO INTERNAL ACCOUNTING  Financial expenses (Except for exceptions, those not related to production).  It is only allowed to incorporate foreign financial expenses in products whose manufacturing process is more than one year -constructions- without counting the interruptions and provided that these expenses have accrued before the stocks are able to be destined for final consumption or its use by other companies.  Sub-activity costs. Also in the RICAC -Resolution of the Institute of Accounting and Audit of accounts- are treated: JOINT PRODUCTION: The allocation of costs to co-products will be based on the most objective criteria possible. In general, the costs attributable to each product must be the most proportional to the net market value or realization of the said product. "Distribution method". The by-products, waste, recovered materials, etc. They are valued the same as the previous ones, unless their value is of secondary importance that can be valued by the net value of realization or replacement. "Method of subtraction" or "Method of recovery". VALUATION OF STOCKS: When stocks are not identifiable individually, the weighted average price method will be adopted. The FIFO is acceptable if the company considers it more convenient for its management. The standard cost is not admitted, unless there are no significant differences with the permitted methods. MANAGEMENT ACCOUNTING Grado en Economía y Administración y Dirección de Empresas © Mariano Soler Porta - Dpto. Contabilidad y Gestión - Universidad de Málaga 7