ias2-inventories

Inventories

IAS 2

Inventories

• Learning Outcomes

• Measure and value inventories

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Definition

• Inventories are assets:

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

(b) in the process of production for such sale; or

(c) in the form of materials or supplies to be consumed in the

production process or in the rendering of services


Definition

K Ltd is in the business of buying and selling laptops. For the company, the

laptops are inventory since the company trades into laptops.

K Ltd sells mobiles. Mobiles, to the extent they are incomplete, would form

part of work-in-progress, and are a part of inventory for K Ltd.

K Ltd manufactures and sells cars. The components for the cars are bought

from other companies. These materials and components are consumed in

the production process, and would form part of the inventory


Cost of inventory

The cost of inventories shall comprise all costs of purchase,

costs of conversion and other costs incurred in bringing the

inventories to their present location and condition.


Cost of purchase

Purchase price;

Import duties and other taxes (other than those subsequently

recoverable by the entity from the taxing authorities);

Transport, handling and other costs directly attributable to the

acquisition of finished goods, materials and services;

Borrowing Costs (for qualifying assets).

Trade discounts, rebates and other similar items are deducted

in determining the costs of purchase.


Cost of conversion

Direct labour;

A systematic allocation of fixed and variable production

overheads incurred in converting materials into finished goods.


Other costs

Only to the extent that they are incurred in bringing the

inventories to their present location and condition.

For example, the costs of designing products for specific

customers


Other costs

• K Ltd manufactures laptops as a standard product. T Ltd

approaches K Ltd to manufacture laptops with a specific

design symbolising T Ltd’s brand and logo.

• Cost of this design would be included in the inventory to the

extent of manufacture for T Ltd.


Excluded from costs

(a) abnormal amounts of wasted materials, labour or other

production costs;

(b) storage costs, unless necessary in the production process

before a further production stage;

(c) administrative overheads not contributing to bringing

inventories to their present location and condition; and

(d) selling costs.


Valuation method

• FIFO or

• Weighted average


Standard Costs

• IAS 2 permits the use of Standard Costs (used predominantly

in manufacturing companies).

• Any deviations are reported in SOCI


Measurement of inventory

IAS 2 provides that the inventory should be measured at cost

or net realisable value, whichever is lower.


Net realisable value

Most reliable estimate available:

K Ltd has 10,000 units of goods in inventory on the reporting date. Cost of a unit is $50. However, the sale price of units sold immediately after the reporting date is $45 per unit.

Purpose for which the inventory is held

K Ltd is in the business of trading of laptops. The company provides a discount of 20% on the cost price if an employee buys a laptop from K Ltd. Of the 1,000 units of laptops lying at K Ltd’s warehouse on the reporting date, 10 are meant to be sold to employees. Cost of a laptop to the company is $400.


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ias2-inventories

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