Accounting Standard Final1

8/3/2019 Accounting Standard Final1

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Valuation of inventories


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INDEX

Introduction

Objective

Definition

ScopeExceptions

Measurements of Inventories

Cost Formula

Cost of inventories in certain conditions

Disclosure

Differences between Indian Accounting Standards and IFRS


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INTRODUCTION

y Accounting standard (AS) 2,Valuation of Inventories, is issued by

the Council of the Institute of Chartered Accountants of India.

y The revised standard comes into effect in respect of accounting

periods commencing on or after 1.4.1999 and is mandatory in

nature.


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OBJECTIVE

Determination of the value at which inventories are carried in the

financial statements until the related revenues are recognized.

This Statement deals with the determination of such value,

including the ascertainment of cost of inventories and any write-

down thereof to net realizable value .


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DEFINITIONS

y 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 theproduction process or in the rendering of services.

y Net realizable value = 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.


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Estimates of net realizable value are based on the most reliableevidence available at the time the estimates are made as to the

amount the inventories are expected to realize. These estimates take

into consideration fluctuations of price or cost directly relating to

events occurring after the balance sheet date to the extent that such

events confirm the conditions existing at the balance sheet date.

Inventories encompass goods purchased and held for resale.

Inventories also encompass finished goods produced


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SCOPE

This Statement should be applied in accounting for inventories other

than:

Work in progress arising under construction contract, including

directly related service contracts Standard (AS)7.

Work in progress arising in the ordinary course of business of service

providers.

Shares, debentures and other financial instruments held as stock-in-

trade.


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EXCEPTION TO THE MENTIONED ABOVE

The inventories referred to above are measured at net realizable

value at certain stages of production. This occurs, for example when

agricultural crops have been harvested sale is assured under a

forward contract or a government guarantee.

When a homogenous market exists and there is a negligible risk of

failure to sell. These inventories are excluded from the scope of this

statement.


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MEASUREMENT OF INVENTORIES

Inventories should be valued at the lower cost & net realizable value.The cost of inventories should comprise :-

All costs of purchase

Costs of conversion .

Other Costs incurred in bringing the inventories to their presentlocation and condition.


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The costs of purchase consist of:

The purchase price.

Duties and taxes ( other than those subsequently

y recoverable by the enterprise from the taxing

y authorities like CENVAT credit).

Freight inwards and other expenditure directly attributable to the

acquisition.


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Producers' inventories of livestock, agricultural and forest products,

and mineral oils, ores and gases to the extent that they are measured

at net realizable value in accordance with well established practices

in those industries.

Trade discounts (but not cash discounts), rebates, duty drawbacksand other similar items are deducted in determining the costs of

purchase


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The costs of conversion include:

Direct costs and Systematic allocation of fixed and variable

production overhead. The costs of conversion of inventories include

costs directly related to the units of production, such as direct labor .

They also include a systematic allocation of fixed and variable

production overheads that are incurred in converting materials into

finished goods.

For example : Most by-products as well as scrap or waste materials, by

their nature, are immaterial. When this is the case, they are often

measured at net realisable value and this value is deducted from the

cost of the main product. As a result, the carrying amount of themain product is not materially different from its cost.


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Other Cost : are included in the cost of inventories only to the

extent that they are incurred in bringing the inventories to their

present location and condition. For example, it may be appropriate to

include overheads.

Certain costs are strictly not taken as cost of inventory:Abnormal amounts ;

Storage costs;

Administrative overheads that do not contribute to bringing the

inventories to their present location and condition.

Selling and Distribution costs.


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METHOD OF INVENTORY VALUATION

Specific Identification Method

Assigns specific cost to each unit.

Suited forhigh value low volume items.

FIFO ( First In First Out) Method

Assumes first unit acquired are the first unit sold.

Weighted Average Cost

Assumes that goods available for sale are homogenous.

It takes the weighted average of all units available for sale during the accounting period andthen uses that average cost to determine the value of COGS and ending inventory. Forexample, the average cost for inventory would be Rs 1.125 per unit, calculated as [(200 x Rs 1.0)+ (200 x Rs 1.25)]/400.


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COST OF INVENTORIES IN CERTAIN CONDITIONS

The following methods may be used for convenience if the results

approximate actual cost:

Standard Cost: It takes into account normal level of consumption

of material and supplies, labor, efficiency and capacity utilization. It

must be regularly reviewed taking into consideration the current

condition.

Retail Method: Normally applicable for retail trade. Cost ofinventory is determined by reducing the gross margin from the sale

value of inventory.


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DISCLOSURE

y The financial statements should disclose:

the accounting policies adopted in measuring inventories, including

the cost formula used.

the total carrying amount of inventories and its classification

appropriate to the enterprise.


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DIFFERENCE BETWEEN INDIAN ACCOUNTING

STANDARD & INTERNATIONAL STANDARD

AS 2 is based on IAS 2 (revised 1993). IAS 2 has been revised in

2003 as a part of the IASBs improvement project. Major differences

between AS 2 and IAS 2 (revised 2003) are as follows:

Differences due to :

1. Level of preparedness

2. Conceptual differences


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DIFFERENCES DUE TO LEVEL OF

PREPAREDNESS

IAS 2 specifically deals with costs of inventories of an enterprise

providing services.However, keeping in view the level of

understanding that was prevailing in the country regarding thetreatment of inventories of an enterprise providing services at the

time of last revision of AS 2, the same are excluded from the scope

of AS 2.

Keeping in view the level of preparedness in the country at the timeof last revision of AS 2, AS 2 requires lesser disclosures as compared

to IAS 2.


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IAS 2 specifically provides that the measurement requirements of the

Standard do not apply to the measurement of inventories held by

commodity broker-traders who measure their inventories at fair

value less costs to sell. AS 2 does not contain any exclusion or

separate provisions relating to inventories held by commodity

broker-traders.(Broker-traders are those who buy or sell commodities

for others or on their own account. The inventories are principallyacquired by a broker-trader with the purpose of selling in the near

future and generating a profit from fluctuations in price or broker-

traders margin). By implication, the measurement basis laid down in

the Standard, viz., lower of cost and net realisable value, applies to

inventories of commodity trader-brokers.


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CONCEPTUAL DIFFERENCES

y AS 2 specifically excludes selling and distribution costs from the

cost of Inventories and provides that it is appropriate to recognise

them as expenses in the period in which they are incurred. However

IAS 2 excludes only Selling Costs and not Distribution Costs.

y AS 2 does not deal with the issues relating to recognition of

inventories as an expense including the write down of inventories to

net realisable value and any reversal of such write down.


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y AS 2 provides that the cost of inventories of items other than those

which are not ordinarily interchangeable and goods or servicesproduced and segregated for specific projects should be assigned by

using the first-in, first-out (FIFO), or weighted average cost formula.

It is specifically required by AS 2 that the formula used should

reflect the fairest possible approximation to the cost incurred in

bringing the items of inventory to their present location andcondition. However IAS 2 does not require the same for the choice

of the formula to be used, rather it requires that same cost formula

should be used for all inventories having a similar nature and use to

the entity.


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THANK YOU!

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Accounting Standard Final1