IAS 2 on Inventories

Summary:

• Definition [IAS 2.6]:
  • Inventories are assets held for sale in regular business, in production for such sales, or as materials to be consumed in production or service provision.
  • Examples include raw materials, work in progress, finished goods, and goods for resale.
• Measurement:
  • Inventories are valued at the lower of cost and net realizable value.
• Components of Cost:
  • Inventory cost = cost of purchase + cost of conversion + other associated costs.
  • Exclusions from cost: carriage outwards, non-production overhead, administrative overhead unrelated to production, storage cost, abnormal waste, and selling costs.
  • Certain borrowing costs may be included under specific conditions.
• Net Realizable Value (NRV):
  • NRV is the estimated selling price minus estimated completion and sales costs.
  • Write-downs to NRV are recorded as an expense, and reversals are noted in the income statement.
  • Reasons for write-downs include damaged or obsolete goods or increased costs/fallen sales prices.
• Double Entry for Write Down:
  • Sale of inventories: Dr Cost of Sales (COS) Cr. Inventory
  • Write-down of inventory: Dr COS Cr. Inventory/Inventory allowance
  • Reversal of write-down: Dr Inventory/Inventory allowance Cr. COS
• Pricing Method:
  • FIFO: Earliest inventory items are sold first.
  • Weighted Average Cost: Average cost determined from similar items over the period.
  • LIFO: Not allowed under IAS 2.
• Spare Parts:
  • Classified either under Inventories (IAS 2) or PPE (IAS 16) based on usage and duration.
  • Depreciation charges vary based on the immediate or delayed use of the spare parts.
• Receipt of Free Assets:
  • Received from government, supplier, customer, shareholders, or others.
  • Treatment varies based on the source and conditions attached, often recorded at Fair Value.
• Account within the Context of a Contract:
  • Deals with non-cash considerations, and allocation principles are applied based on contract specifics.
• Discounts:
  • Varies based on perspective (buyer or seller).
  • Treatment depends on the reason for the discount, such as a settlement or a sales strategy like “Buy 1 Get 1 Free”.

Excerpt:

IAS 2 on Inventories

Definition [IAS 2.6]:

• Inventories are assets:
• Held for sale in the 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 – Eg: Raw material, work in progress, Finished Goods, Goods for resale (trading)