InventoriesIAS 2

LACPA IFRS Presentation

2

Overview of session

1. Introduction – definitions

3. Recognition

4. Disclosure

5. Questions

2. Measurement

Inventories

1. Introduction – definitions

4

Definitions

Inventories are assets:

a) held for sale in the ordinary course of business;

a) in the process of production for such sale; or

a) in the form of materials or supplies to be consumed in the production

process or in the rendering of services

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Inventories

2. Measurement

6

Measurement

Inventories are stated at the lower of cost of and net realisable value.

7

Cost

Cost of Purchase

OtherCosts

Cost of Conversion

Cost of Production:

8

Cost components

• Cost of purchase comprises

i. purchase price

ii. import duties

iii. transport and handling costs

iv. any other directly attributable costs

v. less trade discounts, rebates and subsidies

vi. may include foreign exchange differences, which arise directly on acquisition of inventories invoiced in a foreign currency (refer IAS 21)

9

Cost components

• Cost of conversion comprises:

i. Costs, which are specifically attributable to units of production, that is direct labour, direct expenses and sub-contracted work.

ii. Production overheads: overheads incurred in respect of materials, labour or services for production, based on the normal level of activity, taking one year with another.

10

Cost components

• Other costs may include overheads, attributable in the particular circumstances of the business to bringing the product or service to its present location and condition, e.g. design costs.

• Excluded costs: Usually selling expenses, general administrative overheads, research and development costs and interest costs are not considered to relate to putting the inventories in their present location and condition.

11

Cost Formulae

• Specify the components attributable to the cost of inventory

• Cost formulae:

– First in First Out (FIFO) formula

– Weighted Average Cost formula

• Prohibited Treatment:

– Last in First Out (LIFO) formula

• Consistency required across each type of inventory:

12

Cost Formulae

• FIFO: the calculation of the cost of inventories on the basis that quantities on hand represent the latest purchases or production. This method assumes that the oldest inventories are used up first.

• Weighted average cost: the calculation of inventories by using an average price computed by dividing the total cost of units by the total number of such items.

• An entity needs to use the same cost formula for all inventories of a similar nature and use to the entity

13

Cost components

Which of the above cost categories do the following costs belong to?

Cost Cost Category

Selling costs

Direct labour

Design of finished goods

Import duties on raw material

Fixed production overhead

Purchase of raw material

Abnormal amounts of wasted material

14

Cost components

Answer

Cost Cost Category

Selling costs Excluded

Direct labour Cost of conversion

Design of finished goods Other costs

Import duties on raw material Cost of purchase

Fixed production overhead Cost of conversion

Purchase of raw material Cost of purchase

Abnormal amounts of wasted material Excluded

15

Cost Formulae

Question: ABC trades in chocolates and made the following purchases and sales in the period. There are 10 units left at balance sheet date. Calculate the cost of stock using FIFO and weighted average cost formulae

Transaction Period Quantity Price Total WAC

Purchase June 3 units $ 20 $ 60

Purchase July 7 units $ 30 $ 210

Sale August 4 units

Purchase September 4 units $ 40 $160

16

Cost Formulae

Answer:FIFO: 4 at $40 plus 6 at $30 = 160 plus 180 = $ 340

Weighted average:

Transaction Period Quantity Price Total WAC

Purchase June 3 units $20 $60

Purchase July 7 units $30 $210

Remaining 10 units $270 $27.0

Sale August 4 units $27.0

Remaining 6 units $162 $27.0

Purchase September 4 units $ 40 $160

Remaining 10 units $322 $32.2

17

Net realisable value

Selling Price X

Trade Discounts (X)

Costs to Completion (X)

Marketing, Selling and Distribution Costs (X)

Net Realisable Value X

Net Realisable Value

The estimated selling price in the ordinary course of business less

the estimated costs of completion and estimated costs

necessary to make the sale

Measured at lower of : Cost and Net Realisable Value

18

Cost vs. NRV calculation

A B C

Cost 20 9 12

Selling price 30 12 22

Modification cost to enable sale - 2 8

Marketing costs 7 2 2

Units held 200 150 300

A B C Total

Cost 20 9 12

NRV 23 8 12

Valuation 20 8 12

Quantity 200 150 300

Total value 4,000 1,200 3,600 8800

Item

Item

Inventories

3. Recognition

20

Recognition

• Inventory is a current asset

• Inventory is expensed……when the related revenue is recognised

• The expense of a write down to NRV is recognised……when the write down occurs

What are the Dr and Cr involved in a sale of inventory?

21

Recognition

• Inventory:

Dr Cost of Sales 100

Cr Inventory 100

• Sale:

Dr Cash 150

Cr Sales 150

• Write-down to NRV

Dr Profit and Loss – Inventory write down

Cr Inventory

Inventories

4. Disclosures

23

Disclosures

• Accounting policy

• Balance Sheet

• Income Statement

24

Disclosures

• Accounting policy:

– identify cost formula used (FIFO or weighted average)

– Cost components

– Valuation (lower of cost or NRV)

• Balance Sheet

– Carrying amount of inventories (on face of BS)

– Analyse inventories by classification (e.g. raw materials, finished goods etc…)

• Income Statement

– Cost of inventories expensed in period

– Expense of inventory write-downs included under other operating expenses

Inventories

5. Questions