IAS 2 - Inventories PDF

IFRS Certification  IAS 2 Inventories 2  IAS 2 - Inventories The objective of IAS 2 is to prescribe the accounting treatment for inventories (most types of inventory). It provides guidance for determining the cost of inventories and for subsequently recognising an exp...

IFRS Certification  IAS 2 Inventories 2  IAS 2 - Inventories The objective of IAS 2 is to prescribe the accounting treatment for inventories (most types of inventory). 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. A revised version of IAS 2 was issued in December 2003 and applies to annual periods beginning on or after 1 January 2005. 3  IAS 2 - Inventories  The following items are excluded from the standard: – Work in progress under constructions contract – Financial instruments – Biological assets 4  IAS 2 - Inventories Definition of inventories Inventories are assets: 1. Held for sale in the ordinary course of business. 2. In the process of production for such sale 3. In the form of materials or supplies to be consumed in the production process or in the rendering of services. 5  IAS 2 - Inventories Measurement of closing inventory Closing inventory is measured on a line-by-line basis at the lower of: 6  IAS 2 - Inventories Cost  Cost includes:  Costs of purchase (including import duties, taxes, transport, and handling costs) net of trade discounts received  Costs of conversion (including a systematic allocation of fixed and variable manufacturing overheads. The allocation of fixed overheads is based on normal production capacity; the allocation of variable overheads is based on actual production capacity)  Other costs incurred in bringing the inventories to their present location and condition. 7  IAS 2 - Inventories Cost excludes abnormal waste, storage costs, selling costs.and administrative overheads unrelated to production 8  IAS 2 - Inventories Determining cost Specific identification_ The standard cost and retail methods may be used for the measurement of cost, provided that the results approximate.actual cost IAS 2 allows a choice of formulae to determine cost where the specific cost is not obvious. FIFO or weighted average are the permitted treatments..LIFO is not permitted under IAS 2 9  IAS 2 - Inventories First in First Out (FIFO) Weighted Average (WA) Assumes that items Determined from weighted average cost of: purchased - Items at beginning of (manufactured) first period are sold first - Cost of similar items Inventory at period purchased or produced during the period end is most recently May be calculated on a purchased or periodic basis or on each produced additional shipment 10  IAS 2 - Inventories  Consistency – The same cost formula should be used for all inventories with similar characteristics as to their nature and use to the entity. – For groups of inventories that have different characteristics, different cost formulas may be justified. 11  IAS 2 - Inventories The net realizable value (NRV) NRV: is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Inventories are written down to NRV item by item. Raw materials held for use in the production of inventories are not written down below cost if the finished goods into which they will be incorporated are expected to be sold at or above cost. 12  IAS 2 - Inventories Recognition of an expense The carrying amount of inventories is recognised as an expense when those inventories are sold. Any write-down to NRV is recognised as an expense in the period in which the write-down occurs. Any reversal of any write-down is recognized as a reduction in expense in the period the reversal occurs 13  Questions  Which of the following cost models is not permitted under IAS 2? A. First in First Out (FIFO) B. Last in First Out (LIFO) C. Weighted Average D. Actual cost 14  Questions  Under IAS 2, fixed production overhead should be allocated to items of inventory on the basis of ------ production capacity A. Actual B. Normal C. Abnormal D. Estimated 15  Questions  Which of the following costs is not included while computing the cost of purchase A. Purchase price B. Recoverable tax C. Import duties D. Shipping costs 16  Questions  Inventory should be measured at the lower of cost and ------------- A. Fair value B. Market value C. Net realizable value D. Present value 17  Questions  Which of the following is not permitted as a cost of inventory A. Non-recoverable taxes B. shipping C. Fixed manufacturing overhead D. Storage costs 18 19