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VALUATION OFVALUATION OFINVENTORYINVENTORY

ASAS--22

BYBYR KESAVADASR KESAVADAS

What are covered ?What are covered ?

AssetsAssets heldheld forfor salesale inin thethe ordinaryordinarycoursecourse ofof businessbusiness

AssetsAssets inin thethe processprocess ofof productionproduction forforsuchsuch salesale

AssetsAssets inin thethe formform ofof materialsmaterials ororsuppliessupplies toto bebe consumedconsumed inin thetheproductionproduction processprocess oror inin renderingrenderingservicesservices

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ApplicabilityApplicability

ASAS--22 shouldshould bebe appliedapplied toto allallinventories,inventories, exceptexcept::

ContractContract WIPWIP (covered(covered byby ASAS--77)) WIPWIP ofof serviceservice providersproviders FinancialFinancial instrumentsinstruments (( shares,shares, debenturesdebentures etc)etc) Livestock,Livestock, agriculturalagricultural andand forestforest products,products,

mineralmineral oils,oils, oresores andand gasesgases (to(to thethe extentextentmeasuredmeasured atat NRV,NRV, asas perper establishedestablished industryindustrypractices)practices)

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Basis of ValuationBasis of Valuation

CostCost Lower ofLower of Net Realisable ValueNet Realisable Value

1. costs of purchase1. costs of purchase2.costs of conversion2.costs of conversion3.costs for bringing3.costs for bringing

inventories to presentinventories to presentlocation/conditionlocation/condition..

Estimated Selling PriceEstimated Selling Price((--) Costs of completion) Costs of completion

((--) Costs of sale) Costs of sale

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Cost of PurchaseCost of Purchase

Purchase price including taxes &Purchase price including taxes &dutiesduties

Taxes & duties recoverable fromTaxes & duties recoverable fromtaxing authorities to be excludedtaxing authorities to be excluded

Freight inwards includedFreight inwards included ExcludeExclude--trade discounts, rebates,trade discounts, rebates,

drawbacks etcdrawbacks etc Cash discount being in the nature ofCash discount being in the nature of

interest not consideredinterest not considered55

Cost of conversionCost of conversion

DirectDirect LabourLabour AllocationAllocation ofof overheadsoverheads::

–– VariableVariable:: basedbased onon actualactual productionproduction–– FixedFixed:: basedbased onon normalnormal capacitycapacity ofof

productionproduction–– UnallocatedUnallocated :: treatedtreated asas periodperiod expensesexpenses–– Joint/ByJoint/By--ProductsProducts:: allocationallocation maymay bebe donedone

onon aa rationalrational andand consistentconsistent basis(egbasis(eg:: salessalesvaluevalue etc)etc) ifif costscosts areare notnot separatelyseparatelyidentifiableidentifiable 66

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OverheadsOverheads

Usually exclude:Usually exclude: Interest and borrowing costs(subject toInterest and borrowing costs(subject to

applicability of ASapplicability of AS--16)16) Abnormal wasteAbnormal waste--material, labour ormaterial, labour or

othersothers Storage costsStorage costs-- unless required inunless required in

production processproduction process Administrative costsAdministrative costs Selling and distribution costsSelling and distribution costs 77

What is normal capacity ?What is normal capacity ?

AverageAverage productionproduction expectedexpected overover aanumbernumber ofof periods/seasonsperiods/seasons underunder normalnormalcircumstancescircumstances

LossLoss ofof productionproduction fromfrom normalnormalshutdown/maintenanceshutdown/maintenance toto bebe factoredfactored

ActualActual maymay approximateapproximate normalnormal

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Cost FormulaeCost Formulae

Specific identificationSpecific identification–– If items not interchangeable and specificallyIf items not interchangeable and specifically

identifiableidentifiable FIFOFIFO Weighted averageWeighted average

StandardStandard costscosts –– fixedfixed onon normalnormal capacitycapacitylevelslevels maymay bebe usedused.. ShouldShould bebe reviewedreviewed andandrevisedrevised regularlyregularly

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Net Realisable ValueNet Realisable Value

ToTo bebe assessedassessed onon eacheach balancebalance sheetsheet datedate UsuallyUsually writtenwritten downdown toto NRVNRV onon anan itemitem byby

itemitem basisbasis SometimesSometimes--appropriateappropriate toto groupgroup similarsimilar oror

relatedrelated itemsitems WritingWriting downdown notnot correctcorrect forfor aa classclass asas aa wholewhole

(eg(eg:: allall finishedfinished goods)goods) EventsEvents afterafter balancebalance sheetsheet datedate affectingaffecting

balancebalance sheetsheet datedate positionposition toto bebe consideredconsidered MaterialsMaterials heldheld forfor consumptionconsumption--writtenwritten downdown

onlyonly ifif costcost ofof finishedfinished goodsgoods >> it’sit’s NRVNRV.. ReplacementReplacement costcost maymay bebe usedused asas NRVNRV

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Illustration of NRVIllustration of NRV

TradedTraded goodsgoods –– MarketMarket PricePrice fallsfalls afterafterpurchasepurchase –– newnew marketmarket priceprice lessless costcost ofof salessaleswillwill bebe NRVNRV

RawRaw materialsmaterials heldheld forfor manufacturemanufacture –– NRVNRV willwillbebe calculatedcalculated withwith referencereference toto salesale priceprice ofoffinishedfinished goodsgoods andand fallfall inin priceprice ofof rawraw materialsmaterialswillwill notnot byby itselfitself impactimpact itit..

OnlyOnly variablevariable costscosts toto bebe incurredincurred forfor salesale afterafterthethe reportingreporting datedate toto bebe consideredconsidered asas costscosts ofofsalessales

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Illustration of NRVIllustration of NRV

FixedFixed overheadsoverheads incurredincurred forfor sellingselling inin aa yearyearbeingbeing periodperiod costscosts willwill notnot bebe consideredconsidered ininNRVNRV calculationcalculation asas thethe samesame isis notnot consideredconsideredinin costingcosting

ItIt isis notnot appropriateappropriate toto considerconsider writewrite downdownofof inventoryinventory basedbased onon classificationsclassifications suchsuch asasbusinessbusiness segmentssegments

EstimatesEstimates ofof NRVNRV toto considerconsider purposepurpose forforwhichwhich inventoryinventory isis heldheld.. IfIf therethere isis aa fixedfixedpriceprice contractcontract ofof sale,sale, thisthis shouldshould bebeconsideredconsidered forfor determiningdetermining NRVNRV 1212

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Illustration of NRVIllustration of NRV

InIn casecase quantitiesquantities soso contractedcontracted forfor isis lesslessthanthan quantityquantity ofof inventory,inventory, thethe excessexcessquantityquantity toto bebe valuedvalued onon generalgeneral sellingselling pricepricebasedbased NRVNRV

MakingMaking aa provisionprovision forfor contingentcontingent losseslosses ininthisthis mannermanner isis consistentconsistent withwith parapara 55 ofof ASAS 44..

DeterminingDetermining NRVNRV ofof itemsitems likelike LooseLoose ToolsToolspresentpresent aa challengechallenge asas theythey areare usedused ininmanufacturingmanufacturing butbut notnot consumedconsumed inin thethemanufacturingmanufacturing processprocess..

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DisclosureDisclosure

Accounting policies adoptedAccounting policies adopted Cost formula usedCost formula used Total and classTotal and class--wise amount ofwise amount of

inventory heldinventory held

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Illustration of AccountingIllustration of AccountingPolicy for DisclosurePolicy for Disclosure

InventoriesInventories areare valuedvalued atat lowerlower ofof costcostoror netnet realisablerealisable valuevalue.. CostCost isisdetermineddetermined onon weightedweighted averageaveragemethodmethod.. CostsCosts includesincludes appropriateappropriateelementelement ofof overheadsoverheads incurredincurred forforbringingbringing thethe goodsgoods toto itsits presentpresentconditioncondition andand locationlocation

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Illustration of ClassificationIllustration of Classificationof Inventoriesof Inventories

RawRaw MaterialsMaterials andand componentscomponents PackingPacking materialsmaterials WorkWork inin processprocess FinishedFinished goodsgoods StoresStores andand SparesSpares LooseLoose toolstools

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