1. Wiecek and Young IFRS Primer Chapter 7
Inventories: IAS 2
Wiecek and Young
IFRS Primer
Chapter 7

2. Inventories Related standards IAS 2 Current GAAP comparisons
IFRS financial statement disclosures
Looking ahead
End-of-chapter practice

3. Related Standards FAS 151 Inventory costs—an amendment of ARB 43
ARB 43 Inventories

4. Related Standards IAS 11 Construction contracts
IAS 32 Financial instruments: presentation
IAS 39 Financial instruments: recognition and measurement
IAS 41 Agriculture

5. IAS 2 - Overview Objective and scope Measurement Expense recognition
Disclosure

6. IAS 2 - Objective and Scope
Standards for what costs are recognized as inventory costs and when these costs are transferred to the income statement as expense
IAS 2 excludes construction work-in-progress, inventories of financial instruments, and biological inventory assets related to agricultural activity and agricultural products at the point of harvest

7. IAS 2 - Objective and Scope
Inventories are assets:
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

8. IAS 2 - Measurement
Inventories are measured at the lower of cost and net realizable value (LC and NRV)
Need to know:
- what costs are included
- what cost formulas are permitted
- how net realizable value is determined

9. IAS 2 - Measurement Costs included: Purchase costs Conversion costs
Other inventoriable costs

10. IAS 2 - Measurement Purchase costs
- purchase price and all costs directly attributable to their acquisition such as non-refundable taxes, transportation and handling, reduced by volume discounts and rebates

11. IAS 2 - Measurement Conversion costs
- direct labor, indirect variable and fixed production overhead costs
- variable production overhead: allocate to inventory based on actual usage
- fixed production overhead: allocate to production based on normal operating capacity (except when abnormally high production)

12. IAS 2 - Measurement Joint products
Allocate between products on a rational basis such as relative sales value of products when they become separable
If minor in value, do not allocate: measure by-product at net realizable value and deduct this amount from main product costs

13. IAS 2 - Measurement Other inventoriable costs
- limited to costs to bring the inventories to their present location and condition
- example: amortization of capitalized development costs related to inventory
- borrowing costs included if for a qualifying inventory item (if measured at FV or produced in large volumes on a repetitive basis, borrowing costs may, but are not required to be capitalized)

14. IAS 2 - Measurement Do not add to inventory cost:
Costs of abnormal waste
Storage or warehousing costs unless necessary for next stage of production
Administrative overheads not associated with production
Selling costs
Financing charges above purchase price for normal credit terms

15. IAS 2 - Measurement Cost formulas permitted should:
Assign recent costs to ending inventory
Correspond closely with the actual physical flow of the goods and services
- Three permitted: Specific identification, First-in, first-out, and weighted average

16. IAS 2 - Measurement Specific identification:
For inventory items that are not ordinarily interchangeable
For goods and services produced and segregated for specific projects

17. IAS 2 - Measurement FIFO and weighted average:
FIFO – cost of latest purchases ends up in cost of ending inventory, cost of earliest purchases are in cost of goods sold
Weighted average – weighted average cost of all goods available for sale ends up in both ending inventory and cost of goods sold

18. IAS 2 - Measurement KPMG : The Application of IFRS: Choices
in Practice – International Financial
Reporting Standards, December
2006
Results indicate that the usage of the FIFO and weighted average methods are fairly evenly split by companies reporting under IFRS

19. IAS 2 - Measurement Inventories reported at the LC and NRV
Why? So not reported at more than the future cash flows into the company from their sale
NRV = the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs to make the sale

20. IAS 2 - Measurement LC and NRV example: Cost $ 80 Selling price $ 84
Cost to complete $ 5
Cost to sell 10% of SP
NRV: $84 - $5 - $8.40 = $70.60
LC and NRV = $70.60

21. IAS 2 - Measurement Write-downs are recognized in profit or loss
Subsequent write-ups permitted to maximum of prior write-downs if:
- changed economic circumstances and NRV has increased, prior situation no longer exists
Reversals also taken to profit or loss

22. IAS 2 – Expense Recognition
Carrying amount of inventory sold is expense in same period as the related revenue
Inventory adjustments (losses, write-downs to lower of cost and NRV, write-down reversals, etc.) are recognized as an adjustment to the expense recognized in the period

23. IAS 2 - Disclosure Disclosures needed for: Accounting policies applied
Inventory remaining on statement of financial position
Inventory costs recognized in profit or loss

24. IAS 2 - Disclosure Balance sheet related disclosures:
Carrying amount in each category of inventory (materials, WIP, finished goods, production supplies, merchandise) and in total
Carrying amount of any inventory measured at fair value less costs to sell
Carrying amount of inventory pledged as collateral for liabilities

25. IAS 2 - Disclosure Income statement related disclosures:
Amount of inventory recognized as an expense (usually cost of sales/cost of goods sold)
Amount of write-downs to NRV or other losses
Amount of any write-down reversals
Circumstances that resulted in reversals

26. Current GAAP Comparisons
Pages 104, 122 & 146 of 164 of

27. IFRS Financial Statement Disclosures
Siemens AG
Statement of income page 01 of 118
Statement of fin’l position page 03 of 118
Accounting policy note page 20 of 118
Inventory note page 42 of 118

28. Looking Ahead
There is nothing on the IASB’s current agenda that directly involves potential changes to IAS 2 Inventories

29. End-of-Chapter Practice
7-1 The following costs have been incurred by a manufacturer of small leather goods:
Hides of various leather
Dyes to color the leather
Warehouse costs to store the dyed leather while drying
Patterns and dies used to guide the cutting of the pieces into the desired shape
The salary of the plant manager’s administrative assistant
Costs of the warehouse to store finished goods
Under-applied factory overhead
Instructions
Determine whether the cost of each of the above items is included in the cost of inventory. Provide a brief explanation of your answer for each.

30. End-of-Chapter Practice

31. End-of-Chapter Practice

32. End-of-Chapter Practice

33. End-of-Chapter Practice

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