1. Group 2 ❖ IAS 2 Inventories ❖ IAS 36 Impairment of Assets ❖ IAS 40 Investment Propert y G

2. Members of Group 2 Sl NameRoll 1 Md Rashed Mahfuz21 AIS 008 2 Md. Abdullah - Al - Firoz21 AIS 011 3 Sharifa Sadia Akter21 AIS 016 4 Jesmin Sultana21 AIS 021 5 Mohiuddin Ahmed21 AIS 026 6 Sujan. Miah21 AIS 031 7 Nusrat Jahan Achal21 AIS 036 8 Nasir Ahmed21 AIS 041 9 Fariha Ferdows Nitu21 AIS 046 10 Mamon Chakma21 AIS 051 11 Sardar Ashraful Islam Dip21 AIS 056

3. IAS 2 (Inventories)

4. Overview  Introduction  Objective and Scope  Definitions  Measurement  Cost of Inventories  Excluded Costs  Service Provider’s Inventory  Cost Measurement- Techniques  Cost Formula  Net Realizable Value  Recognition of an Expense  Disclosure

5. Introduction  Originally IAS 2; Valuation and presentation of Inventories in the context of the historical cost system issued in October 1975  Replaced by IAS2; Inventories issued by IASC in 1993  It was revised by IASB in December 2003  It should be applied for annual periods beginning on or after 1January 2005.

6. Objective ❑ To prescribe the accounting treatment for inventories ❑ To provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value (NRV). ❑ To provide guidance on cost formulas to assign cost to inventories

7. Scope IAS 2 applies to all inventories, except the following:  Work in progress arising under construction contracts, (IAS 11 Construction Contracts)  Financial instruments (IAS 39 Financial Instruments)  Biological assets related to agricultural activity and agricultural produce at the point of harvest (IAS 41 Agriculture).

8. Definition  Inventories are assets: ❑ (a) held for sale in the ordinary course of business ❑ (b) in the process of production for such sale; or ❑ (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. Inventories can include :  Goods purchased and held for resale  Finished Goods  Work in process being produces  Raw materials

9. Definition (Continued….)  Net Realisable Value (NRV) is the estimated selling price in the ordinary course of business less estimated costs of completion and the estimated costs necessary to make the sale  Fair Value (FV) is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

10. Measurement  Inventories shall be measured at the lower of cost and the net realisable value (NRV)

11. Cost of Inventories The cost of inventories shall comprise all : ❑ Costs of purchase, ❑ Costs of conversion and ❑ other costs incurred in bringing the inventories to their present location and condition.

12. Cost of Inventories (Continued) Costs of purchase includes:- ❑ Purchase price ❑ Import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), and ❑ transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services less Trade discounts, rebates and other similar amounts

13. Cost of Inventories (Continued) Cost of Conversion The costs of conversion consists of :  costs directly related to the units of production, such as:-direct martials and direct labour.  Fixed and variable production overheads that are incurred in converting materials into finished goods allocated on the basis of normal production capacity.  In case of Joint Products: Costs are allocated between the products on a rational & consistent basis.

14. Cost of Inventories (Continued) Other costs  Other costs incurred in bringing the inventories to their present location and condition  For Example:- Costs of non production overheads or the cost of designing products for specific customers can be included in the cost of inventories

15. Excluded costs IAS 2 lists two types of costs that excluded from the cost of inventories and recognized as an expenses in the period in which 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.

16. Service Provider’s Inventory  Measured at cost of production  Production cost consist of ✔ Labour and other personnel costs ✔ Attributable Overheads  Excluding Selling and admin expenses  Profit Margin and non attributable overheads are excluded

17. Cost Measurement-Techniques  Standard costs: Standard costs take into account normal levels of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, revised in the light of current conditions  Retail method: The retail method is often used in the retail industry for measuring inventories of large numbers of rapidly changing items with similar margins for which it is impracticable to use other costing methods

18. An Example of Retail method A retailer identifies inventories at the end of an accounting period as follows :  Department A: Inventory with a selling price of Tk. 20,000. This department makes a 20% gross profit on its sale  Department B: Inventory with a selling price of Tk. 25,000.This department sets its selling price at cost plus 30% Requirement : Calculate the value of inventory of each department Solution: Department A: selling price of Tk. 20,000 less gross profit 20%, So the value of inventory : Tk. ((20,000-(20,000*.20))=tk. 16,000 Department B: If selling price is cost plus 30%, then selling price must be 130% of cost and the gross profit must be 30/130=23.08% So the value of inventory :Tk.((25,000-(25000*0.2308))=Tk. 19,230

19. Cost Formulae  Specific Identification: that specific costs are attributed to identified items of inventory. This is the appropriate treatment for items that are segregated for a specific project, regardless of whether they have been bought or produced.  FIFO or Weighted Average :  The cost of inventories, in other shall be assigned by using the first-in, first-out (FIFO) or weighted average cost formula.  An entity shall use the same cost formula for all inventories having a similar nature and use to the entity.  But if not in similar nature it may use different cost formulae.

20. Net realizable value  NRV=Estimated selling price less cost to sell  General Rule=Assets should not be carried at amounts greater than those to be realised from their sale or use. This applies to inventory where NRV falls below cost.  Reasons for NRV becomes lower than the cost :  An increase in cost or fall in selling price  A physical deterioration in the condition of inventory  Damage/obsolescence of product  A strategic decision to manufacture or sell a product at a loss  Errors in production or purchasing

21. Recognition as an Expense  When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised.  The amount of any write-down of inventories to net realisable value and all losses of inventories shall be recognised as an expense in the period the write-down or loss occurs.

22. Disclosure  The financial statements shall disclose:  (a) the accounting policies adopted in measuring inventories, including the cost formula used;  (b) the total carrying amount of inventories  (c) the carrying amount of inventories carried at fair value less costs to sell;  (d) the amount of inventories recognised as an expense during the period;  (e) the amount of any write-down of inventories recognised as an expense in the period  (f) the 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  (g) the circumstances or events that led to the reversal of a write-down of inventories and  (h) the carrying amount of inventories pledged as security for liabilities. The financial statement must also disclosed one of two things:  The cost of inventory recognised as an expense during the period  The operating cost applicable to revenue, recognised as an expense during the period classified by their nature.

23. IAS 36 Impairment of Assets

24. IAS 36 -Overview ❑ Objective and scope ❑ Basic Principle ❑ Indications Of impairment ❑ Measuring the recoverable amount of the asset ❑ Accounting Treatment of impairments ❑ Disclosure

25. Objective of IAS 36 ❑ IAS 36 ensures that assets are reported on the statement of financial position at no more than the entity can recover from their use or sale. ❑ May be an impairment loss-"the amount by which the carrying amount of an asset or a cash-generating unit (CGU) exceeds its recoverable amount"

26. Scope  This Standard shall be applied in accounting for the impairment of all assets, other than: ❑ inventories ❑ assets arising from construction contracts ❑ employee benefit assets ❑ deferred tax assets ❑ financial assets under IAS 39 ❑ non-current assets or disposal groups held-for-sale ❑ investment property, biological assets based on FV measurements

27. Basic Principle Impairment loss Amount by which carrying amount of an asset or cash generating unit exceeds its recoverable amount. Carrying amount The amount at which as asset is recognized after deducting any accumulated depreciation and accumulated impairment losses thereon. Book value OR value displayed in balance sheet.

28. Recoverable amount The amount,which is expected to be recovered by use or sale of the asset, whichever is higher. ▪The recoverable amount of an asset is the greater of the two calculations shown below: ▪Recoverable Amount= Fair Value - Cost of Disposal ▪Recoverable Amount = Value in Use Fair value less costs to sell Fair value is the price that would be received to sell an asset. Costs to sell would include legal costs to selling and direct incremental costs which would necessarily be incurred if the asset is sold

29. Example: Company A  Building purchased=$ 2 million; using straight line depreciation  Estimated Life= 20 years  Used years by building= 5 years  Selling cost of building=$ 1 million  Cost incurred=$ 50,000 or$ 0.05 million  PY of net cash flows the building=$ 1.2 million (alternatively) The basic rule is to recognize impairment if carrying amount exceeds the recoverable amount. The building has a cost of $2 million, useful life of 20 years and is used for 5 years. The accumulated depreciation is $2/20*5 or 0.5 million Carrying amount= building purchased - accumulated depreciation =2M-0.5 M =$ 1.5 M

30. Recoverable amount is the higher of fair value less costs to sell and value in use. Fair value less costs to sell=$ 1 million - $0.05 million = $0.95 million. OR Value in use is the present value of future cash flows=$1.2 million. Carrying amount is $1.5 million while recoverable amount is $1.2 million. An impairment loss of $0.3 million is to be recognized. The journal entry would be: Impairment loss 300,000 Accumulated impairment loss 300,000

31. Indicators of Impairments Internal Factors  Physical damage of obsolescence of the asset.  Significant changes have taken place or are likely to take place which have an adverse affect on the entity or the manner of using the assets. External Factors  Significant decline in market value of the asset  Changes in technological environment  Changes in legal environment

32. Measuring the recoverable amount of the asset Recoverable amount of an asset: is the higher of: ❑ Its fair value less costs to sell, and ❑ Its value in Use

33. Fair Value less Costs to sell Fair value less costs to sell: the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less costs of disposal. ❖ Active market ❖ No active market

34. Value in use  Value in use: the present value of the future cash flows expected to be derived from an asset. ❖ Reasonable and supportable assumptions. ❖ Most recent budgets etc. approved by management ❖ Inflows and outflows should be eliminated separately ❖ Financing and tax should be excluded

35. Accounting Treatment of impairments If the recoverable amount of an asset is less than the carrying amount, the difference is the impairment loss. An impairment loss for assets at a historical cost is treated as a decrease on revaluation and is recognised as an expense in the income statement. If the impairment loss relates to an asset that has previously been revalued, then it is treated as a revaluation decrease and not as an impairment loss Depreciation charges in future accounting periods will be set to write off the revised carrying amount, less residual value, over its remaining useful life.

36. Disclosure An entity shall disclose the following for each class of assets:  the amount of impairment losses recognized in profit or loss  the amountof reversals of impairment losses recognized in profit or loss  Explanation of the events and circumstances that contributed to the impairment loss or reversal

37. Additional disclosure  The events that led to the recognition of the loss.  The amount  The nature of the asset  Whether the recoverable amount is fair value less costs to sell or value in use

38. IAS 40 Investment Property

39. Objective And Scope  Objective Prescribe accounting treatment for investment properly and related disclosure requirements  Scope The standard shall be applied in the recognition, measurement and disclosure of investment property.

40. Definition  Investment property: is the property(land or building or part of a building or both)held(by the owner or by the lessee under a finance lease) to earn rentals for capital appreciation or both rather than for- ● Use in the production or supply of goods or service or for administrative purposes or ● Sale in the ordinary course of business Owner-occupied property: is the property held(by the owner or by the lessee under a finance lease)for use in the production or supply of goods or services or for administrative purposes.

41. Definition (Continued…)  Carrying amount : is the amount at which an asset is recognized after deducting any accumulated depreciation and accumulated impairment losses.  Fair value: is 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.  Impairment :is a fall in the value of an asset, recoverable less than it’s carrying amount

42. Classification of property As Investment property or owner occupied property  Examples of investment property:  land held for long term capital than for short term sale in the ordinary course of business.  land held for a currently undetermined future use.  a building owned by the entity (or held by the entity under a finance lease) and leased out under one or more operating leases.  a building that is vacant but is held to be leased out under one or more operating leases.  property that is being constructed or developed for future use as investment properly.

43. Example of items that are not investment property:  property intended for scale in the ordinary course of business or in the process of construction or development for such sale (IAS-2).  owner occupied property (IAS-16).  property that is leased to another entity under a finance lease.

44. Recognition  Investment property shall be recognized as an asset when, and only when:  (a)it is probable that the future economic benefits that are associated with the investment property will flow to the entity ; and  (b)the cost of the investment property can be measured reliably.

45. Measurement at Recognition  An investment property shall be at its cost.  Transaction costs shall be included in the initial measurement.

46. Elements of Costs  The cost of a purchased investment Property comprises:-  (a) its purchase price and  (b) Directly attributable expenditure for example, professional fees for legal services, property transfer taxes and other transaction costs.

47. The cost of an investment property is not increased by:  (a) start-up costs (unless they are necessary to bring the property to the condition necessary for it to be capable of operating in the manner intended by management)  (b) operating losses incurred before the investment property achieves the planned level of occupancy, or  (c) abnormal amounts of wasted material,labour or other resources incurred in constructing or developing the property.

48. Measurement After Recognition Accounting policy An entity shall choose either the fair value model or the cost model. Fair value model  After initial recognition, an entity that chooses the fair value model shall measure all of its investment property at fair value.  A gain or loss arising from a change in the fair value of investment property shall be recognized in profit or loss for the period in which it arises.

49. Measurement After Recognition If an entity has previously measured an investment property at fair value, it shall continue to measure the property at fair value until disposal (or until the property becomes owner-occupied property or the entity begins to develop the property for subsequent sale in the ordinary course of business) even if comparable market transactions become less frequent or market prices become less readily available. Cost model After initial recognition, an entity that chooses the cost model shall measure all of its investment properties in accordance with IAS 16's requirements for that model, other than those that meet the criteria of IFRS 5.

50. Transfers Transfers to, or from, investment property shall be made when, and only when, there is a change in use, evidenced by: (a) commencement of owner-occupation, for a Transfer from investment property to owner occupied property; (b) commencement of development with a view to sale, for a transfer from investment Property to inventories; (c) end of owner-occupation, for a transfer from owner occupied property to investment property; or (d) commencement of an operating lease to another party, for a transfer from inventories to investment property.

51. Disposals  An investment property shall be derecognized (eliminated from the statement of financial position) on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal.  Gains or losses arising from the retirement or disposal of investment property shall be recognised in profit or loss.  Compensation from third parties for investment property that was impaired, lost or given up shall be recognized in profit or loss when the compensation becomes receivable.

52. Disclosure An entity shall disclose: (a) whether it applies the fair value model or the cost model. (b) the amounts recognized in profit or loss (c) net gains or losses from fair value adjustments (d) transfers to and from investment property (e) the depreciation methods used (f) the useful lives or the depreciation rates used