IFRS 1

Hammad Sarwar(HS)

IAS 2 INVENTORIES

VALUATION

INTERCHANGEABLE ITEMS

Inventories
Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the ordinary course of business (work in process), and Materials and supplies that are consumed in production (raw materials).

Valuation (IAS 2)

Inventories shall be measured at the lower of: (a) Cost (b) Net realisable value

Allowable costs per IAS 2

The cost of inventories shall comprise all of the Costs of purchase, Purchase price, import duties and other taxes and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services, less trade discount, rebates and other similar items.

Costs of conversion and direct labour, direct expenses and sub-contracted work, Systematic allocation of fixed and variable production overheads incurred in converting materials into finished goods The allocation of fixed production overheads to units of production is based on normal capacity (average over a number of seasons under normal circumstances).

IFRS 2

Hammad Sarwar(HS)

Other costs incurred in bringing the inventories to their present location and condition. Non-production overheads of designing a product for a specific customer. IAS 23 Borrowing Costs identifies some limited circumstances where borrowing costs (interest) can be included in cost of inventories that meet the definition of a qualifying asset.

Net realizable value

It is the estimated selling price in the ordinary course of business less: (a) Estimated costs of completion, and (b) Estimated costs necessary to make the sale (e.g. marketing, selling and distribution costs). Inventory cost should not include abnormal waste storage costs administrative overheads unrelated to production selling costs foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency interest cost when inventories are purchased with deferred settlement terms.

Interchangeable items
Cost formulas The following estimation methods are allowed under IAS 2: (a) FIFO (first in, first out): OR (b) Weighted average cost:

IFRS 3

Hammad Sarwar(HS)

Sundry points
The use of the LIFO (last in first out) method is not permitted. An entity must use the same cost formula for all inventories having a similar nature and use to the entity. The standard cost and retail methods may be used for the measurement of cost, provided that the results approximate actual cost. [IAS 2.21-22] For inventory items that are not interchangeable, specific costs are attributed to the specific individual items of inventory

June 2007 Q2 b, Wader is assessing the valuation of its inventory. It has a significant quantity of a product and needs to evaluate its value for balance sheet purposes. Sales of the product are high, but it incurs high production costs. The reason for its success is that a sales commission of 20% of the list selling price is paid to the salesforce. The following details relate to this product: $ per unit List price normal selling price 50 Allocation of customer discounts on selling price 25 Warehouse overheads until estimated sale date 4 Basic salaries of sales team 2 Cost of product 35 The product is collected from the warehouses of Wader by the customer. Discuss the accounting treatment of the above items in the financial statements for the year ended 31 May 2007. (4 marks)

PRACTICE QUESTIONS EXAMPLE 1 ABC LLC manufactures and sells paper envelops. The stock of envelopes was included in the closing inventory as of December 31, 2005, at a cost of $50 each per pack. During the final audit, the auditors noted that the subsequent sale price for the inventory at January 15, 2006, was $40 each per pack. Furthermore, inquiry reveals that during the physical stock take, a water leakage has created damages to the paper and the glue. Accordingly, in the following week, ABC LLC has spent a total of $15 per pack for repairing and reapplying glue to the envelopes. The net realizable value__________ and inventory write-down (loss) amount to_____________

IFRS 4

Hammad Sarwar(HS)

EXAMPLE 2 During an inventory count on 31 March 2009 items that had cost $6 million were identified as being either damaged or slow moving. It is estimated that they will only realise $4 million in total, on which sales commission of 10% will be payable. It has not been recorded in companys bookkeeping system, how this transaction should be treated in the financial statements at 31 march 2009.

EXAMPLE 3 (H.A) Moonstruck Enterprises Inc. is a retailer of Italian furniture and has five major product lines: sofas, dining tables, beds, closets, and lounge chairs. At December 31, 200X, quantity on hand, cost per unit, and net realizable value (NRV) per unit of the product lines are as follows: Product line Quantity Cost Estimated Selling price on hand per unit ($) per unit ($) Sofas Dining tables Beds Closets Lounge chairs 100 200 300 400 500 1,000 500 1,500 750 250 1,020 450 1,600 770 200

Selling expenses are 10% of the proceeds Required Compute the valuation of the inventory of Moonstruck Enterprises at December 31, 200X, under IAS 2 using the lower of cost and NRV principle.

Total paragraphs in IAS 2

42 It was first issued in 1975