Presentation on theme: "IAS 2 Inventory. IAS 2 does not apply to Work in progress arising under construction contracts including directly related service contracts Financial."— Presentation transcript:
IAS 2 Inventory
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.
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.
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
The larger the closing inventory the smaller the cost of sales, the larger the gross profit Trading A/C Trading10,000 Less cost of sales Opening inventory2,000 Purchases1,500 3,500 Less Closing inventory1,200 Cost of Sales2,300 GROSS PROFIT7,700 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
Fundamental Principle Inventory valued at the lower of Cost or NRV Prudence – not to overstate/understate the assets
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.
NRV greater than Cost but… NRV may be lower if… – Damaged – Obsolete – Change in market demand – Physical deterioration
Calculate NRV Sale Price – further costs that may be incurred to complete the production of the item – costs to sell and distribute the item
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
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.
Measurement 1.Actual unit cost 2.FIFO 3.Weighted average costs 4.Standard cost 5.Retail method
Measurement 1.Actual unit cost 2.FIFO 3.Weighted average costs 4.Standard cost 5.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
Measurement 1.Actual unit cost 2.FIFO 3.Weighted average costs 4.Standard cost 5.Retail method First In First Out Inventory is made up of the latest purchases. LIFO method banned.
Measurement 1.Actual unit cost 2.FIFO 3.Weighted average costs 4.Standard cost 5.Retail method Weighted Average Weighted average purchase price over the year used to value closing inventory
Measurement 1.Actual unit cost 2.FIFO 3.Weighted average costs 4.Standard cost 5.Retail method Standard Cost Standard costs reviewed frequently to ensure that they bear a reasonable relationship to actual costs during the period
Measurement 1.Actual unit cost 2.FIFO 3.Weighted average costs 4.Standard cost 5.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.
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
Reversal of Write Down Increase in NRV - Expense Reversal of Write Down
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.
Q1 Inventories should be valued at the lower of Cost or NRV
Q2 Stock cost 60,000 NRV 40,000 40,000 x 2.5% = 1,000 Write down = 20, ,000 = 21,000 JournalDrCr Inventory Write Down Expense A/C (P&L) 21,000 Inventory A/C (SFP)21,000 Being the write down of slow moving stock
Q3 The following costs cannot be included as part of the cost of inventory: – Selling costs
Q4 + receivables 55,000 + sales 50,000 + VAT 5,000 + Expense 45,000 - CA inventory 45,000 JournalDrCr Receivables55,000 Sales50,000 VAT5,000 Being the sale of goods on credit not accounted for JournalDrCr Inventory Expense (P&L) 45,000 Inventory (SFP)45,000 Being the correction of overestimation of closing stock
Q5 Write down 300, ,000 x 50% = 150,000 Insurance receivable CA Recoverable value JournalDrCr Insurance Compensation Receivable (SFP) 150,000 Compensation receivable (SPL) 150,000 Being the compensation for stock destroyed in fire JournalDrCr Inventory expenses (P&L) 300,000 Inventory (SFP)300,000 Being the write down of stock destroyed in fire
Q6 + receivables 50 x sales 50 x x 280 = 196, x 300 = 225,000 Adjustment 29,000 + expense - CA inventory JournalDrCr Receivables14,000 Sales14,000 Being the sale of goods on credit not accounted for JournalDrCr Inventory expense (P&L) 29,000 Inventory (SFP)29,000 Being the write down of inventory to NRV
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
CostNRV Materials15,000Selling Price250 Labour20,000Less Marketing Costs25 Depreciation10,0001 table225 Factory Rates5,00050 x 22511,250 Factory Expenses10,000 Other production Expenses5, tables6,500 1 table x 1306,500