The Institute of Chartered Accountants of India, New Delhi 1 Ind AS 2 - Inventories By Ind AS (IFRS) Implementation Committee The Institute of Chartered Accountants of India (Set up by an Act of Parliament) New Delhi

The Institute of Chartered Accountants of India, New Delhi Ind AS (IFRS) Implementation Committee Introduction Ind AS 2 “Inventories”, prescribe the accounting for inventory. The areas dealt in this standard are: 2 Measurement (Initial & Subsequent) Disclosures

The Institute of Chartered Accountants of India, New Delhi Ind AS (IFRS) Implementation Committee Scope Exclusions IND AS 2 does not apply to: Financial instruments (Ind AS 109 Financial Instruments and Ind AS 32 Financial Instruments: Presentation ) Biological assets (IAS 41 Agriculture) IND AS 2 does not apply to the measurement of inventories held by: Producers of agricultural and forest products being measured at Net realizable value (NRV) Minerals and mineral products being measured at NRV Commodity brokers who measure such inventory at fair value less costs to sell. 3

The Institute of Chartered Accountants of India, New Delhi Ind AS (IFRS) Implementation Committee Definition Inventories are assets: Held for sale in ordinary course of business In the process of production for such sale In the form of materials or supplies to be consumed in the production process or in the rendering of services. 4

The Institute of Chartered Accountants of India, New Delhi Ind AS (IFRS) Implementation Committee Initial Measurement The costs attributed to inventories under Ind AS 2 comprises of: 5 Purchase price Import duties Other taxes (other than those recoverable from tax authorities) Transport, and handling charges Other cost directly attributable to inventories Trade discounts, rebates are deducted from the cost of purchase Cost of purchase Costs directly related to unit of production Allocation of fixed and variable production overheads Cost of conversion Only if incurred in bringing the inventories to their present location and condition Other costs

The Institute of Chartered Accountants of India, New Delhi Ind AS (IFRS) Implementation Committee What may be included in cost? At Cost which: includes- excludes- 6 Interest cost (where settlement is deferred) Costs of purchase including non- recoverable taxes, transport and handling Net of trade volume rebates Costs of conversion Other costs to bring inventory into its present condition and location. Abnormal waste Storage costs (unless necessary for the production process) Admin overheads not related to production Selling costs

The Institute of Chartered Accountants of India, New Delhi Ind AS (IFRS) Implementation Committee Subsequent Measurement Measurement – Lower of or 7 Cost Net Realisable Value (NRV)

The Institute of Chartered Accountants of India, New Delhi Ind AS (IFRS) Implementation Committee Cost Measurement Techniques and Formulas Cost Measurement Techniques Standard cost method Retail method Cost Formulas FIFO Weighted average cost For non-interchangeable items – Specific identification LIFO is prohibited 8

The Institute of Chartered Accountants of India, New Delhi Ind AS (IFRS) Implementation Committee Net Realizable Method NRV 9 Estimated selling price in the ordinary course of business Estimated costs of completion Estimated costs necessary to make the sale Note - Fair value is defined, as in IND AS 113 – Fair Value Measurement, as '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.' The standard points out that net realisable value is an entity-specific value, the amount that the entity actually expects to make from selling that particular inventory, while fair value is not.

The Institute of Chartered Accountants of India, New Delhi Ind AS (IFRS) Implementation Committee Recognition in P&L Ind AS 2 specifies that when inventory is sold, the carrying amount of the inventory must be recognised as an expense in the period in which the revenue is recognised. Inventory that goes into the creation of another asset, for instance into a self-constructed item of PP&E, would form part of the cost of that asset. Subsequently these costs are expensed through the depreciation of that item of PP&E during its useful life. Any write-downs or losses of inventory must be recognised as an expense when the write-down or loss occurs. Reversals of previous write-downs are recognised as a reduction in the inventory expense recognised in the period in which the reversal occurs. 10

The Institute of Chartered Accountants of India, New Delhi Ind AS (IFRS) Implementation Committee Disclosures accounting policies along with the cost formula carrying amount of inventories – total and class wise carrying amount of inventories carried at fair value less costs to sell; amount of inventories recognised as an expense during the period; amount of any write-down of inventories recognised as an expense in the period; amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognised as expense in the period; circumstances or events that led to the reversal of a write-down of inventories; and carrying amount of inventories pledged as security for liabilities. 11

The Institute of Chartered Accountants of India, New Delhi Ind AS (IFRS) Implementation Committee Transitional Provisions and Carve outs from IFRS Carve Out from IFRS In principle there is no difference between Ind AS and IFRS but Ind AS 1 has carve out which impacts the presentation of inventories which is as discussed below. Under IAS 1, an entity shall present an analysis of expenses recognised in profit or loss using a classification based on either their nature or their function within the entity, whichever provides information that is reliable and more relevant. Whereas Ind AS 1 requires only nature-wise classification of expenses. 12

The Institute of Chartered Accountants of India, New Delhi Ind AS (IFRS) Implementation Committee IND AS 2 vs AS 2 13 ParticularsIND AS 2AS 2 Cost formulaeConsistent application same cost formula for all inventories that have a similar nature and use to the entity. It is not expressly mandated to use the same cost formula consistently for all inventories that have a similar nature and use to the entity instead it shall reflect the fairest possible approximation to the cost incurred. Inventories acquired on deferred settlement terms Specifically requires that where an inventory is acquired on deferred settlement terms, the entity needs to identify finance element separately. Not contain any specific requirement for separation of finance element.

The Institute of Chartered Accountants of India, New Delhi Ind AS (IFRS) Implementation Committee 14 THANK YOU ……………………………