IAS 2 Inventories - Lecture notes 2 PDF

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IAS 2 Inventories

Accounting for inventory IAS 2 Inventories Inventories are valued at the lower of cost and net realisable value (NRV). Definition of cost Cost is the cost of bringing items of inventory to their present location and condition (including cost of purchase and costs of conversion). Cost of purchase comprises: • purchase price including import duties, transport and handling costs • any other directly attributable costs, less trade discounts, rebates and subsidies. Cost of conversion comprises: • costs which are specifically attributable to units of production, e.g. direct labour, direct expenses and subcontracted work • production overheads, which must be based on the normal level of activity • other overheads, if any, attributable in the particular circumstances of the business to bringing the product or service to its present location and condition. The following costs should be excluded and charged as expenses of the period in which they are incurred: • abnormal waste

• storage costs • administrative overheads which do not contribute to bringing inventories to their present location and condition • selling costs.

NRV is the estimated selling price, in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale Inventory valuation methods IAS 2 deals with three methods of arriving at cost: • actual unit cost • first in, first out (FIFO) • weighted average cost (AVCO). Disclosure requirements The main disclosure requirements of IAS 2 are: • accounting policy adopted, including the cost formula used • total carrying amount, classified appropriately • amount of inventories carried at NRV • amount of inventories recognised as an expense during the period • details of any circumstances that have led to the writedown of inventories to their NRV.

Value the following items of inventory.

(a) Materials costing $12,000 bought for processing and assembly for a profitable special order. Since buying these items, the cost price has fallen to $10,000. (b) Equipment constructed for a customer for an agreed price of $18,000. This has recently been completed at a cost of $16,800. It has now been discovered that, in order to meet certain regulations, conversion with an extra cost of $4,200 will be required. The customer has accepted partial responsibility and agreed to meet half the extra cost

Solution (a) Value at $12,000. $10,000 is irrelevant. The rule is lower of cost or NRV, not lower of cost or replacement cost. Since the special order is known to be profitable, the NRV will be above cost. (b) Value at NRV, i.e. $15,900, as this is below cost of $16,800. (NRV = contract price, $18,000 – our share of modification cost, $2,100).

PRACTICE FROM REVISION KIT KAPLAN Section A

MCQs

68,70,71,72,73

Section B

258,259,260...