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Inventories: IAS 2
Wiecek and Young
IFRS PrimerChapter 7
2
Inventories
Related standards IAS 2 Current GAAP comparisons IFRS financial statement disclosures Looking ahead End-of-chapter practice
3
Related Standards
FAS 151 Inventory costs—an amendment of ARB 43
ARB 43 Inventories
4
Related Standards
IAS 11 Construction contracts IAS 32 Financial instruments: presentation IAS 39 Financial instruments: recognition and
measurement IAS 41 Agriculture
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IAS 2 - Overview
Objective and scope Measurement Expense recognition Disclosure
6
IAS 2 - Objective and Scope
Standards for what costs are recognized as inventory costs and when these costs are transferred to the income statement as expense
IAS 2 excludes construction work-in-progress, inventories of financial instruments, and biological inventory assets related to agricultural activity and agricultural products at the point of harvest
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IAS 2 - Objective and Scope
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
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IAS 2 - Measurement
Inventories are measured at the lower of cost and net realizable value (LC and NRV)
Need to know:
- what costs are included
- what cost formulas are permitted
- how net realizable value is determined
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IAS 2 - Measurement
Costs included:
1. Purchase costs
2. Conversion costs
3. Other inventoriable costs
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IAS 2 - Measurement
Purchase costs
- purchase price and all costs directly attributable to their acquisition such as non-refundable taxes, transportation and handling, reduced by volume discounts and rebates
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IAS 2 - Measurement
Conversion costs
- direct labor, indirect variable and fixed production overhead costs
- variable production overhead: allocate to inventory based on actual usage
- fixed production overhead: allocate to production based on normal operating capacity (except when abnormally high production)
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IAS 2 - Measurement
Joint products
- Allocate between products on a rational basis such as relative sales value of products when they become separable
- If minor in value, do not allocate: measure by-product at net realizable value and deduct this amount from main product costs
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IAS 2 - Measurement
Other inventoriable costs- limited to costs to bring the inventories to their present location and condition- example: amortization of capitalized development costs related to inventory- borrowing costs included if for a qualifying inventory item (if measured at FV or produced in large volumes on a repetitive basis, borrowing costs may, but are not required to be capitalized)
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IAS 2 - Measurement
Do not add to inventory cost: Costs of abnormal waste Storage or warehousing costs unless
necessary for next stage of production Administrative overheads not associated with
production Selling costs Financing charges above purchase price for
normal credit terms
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IAS 2 - Measurement
Cost formulas permitted should:- Assign recent costs to ending inventory- Correspond closely with the actual physical
flow of the goods and services
- Three permitted: Specific identification, First-in, first-out, and weighted average
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IAS 2 - Measurement
Specific identification: For inventory items that are not ordinarily
interchangeable For goods and services produced and
segregated for specific projects
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IAS 2 - Measurement
FIFO and weighted average: FIFO – cost of latest purchases ends up in
cost of ending inventory, cost of earliest purchases are in cost of goods sold
Weighted average – weighted average cost of all goods available for sale ends up in both ending inventory and cost of goods sold
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IAS 2 - Measurement
KPMG : The Application of IFRS: Choices
in Practice – International Financial
Reporting Standards, December
2006
Results indicate that the usage of the FIFO and weighted average methods are fairly evenly split by companies reporting under IFRS
19
IAS 2 - Measurement
Inventories reported at the LC and NRV Why? So not reported at more than the future
cash flows into the company from their sale NRV = the estimated selling price in the
ordinary course of business less the estimated costs of completion and the estimated costs to make the sale
20
IAS 2 - Measurement
LC and NRV example: Cost $ 80 Selling price $ 84 Cost to complete $ 5 Cost to sell 10% of SP
NRV: $84 - $5 - $8.40 = $70.60
LC and NRV = $70.60
21
IAS 2 - Measurement
Write-downs are recognized in profit or loss Subsequent write-ups permitted to maximum
of prior write-downs if:
- changed economic circumstances and NRV has increased, prior situation no longer exists
Reversals also taken to profit or loss
22
IAS 2 – Expense Recognition
Carrying amount of inventory sold is expense in same period as the related revenue
Inventory adjustments (losses, write-downs to lower of cost and NRV, write-down reversals, etc.) are recognized as an adjustment to the expense recognized in the period
23
IAS 2 - Disclosure
Disclosures needed for: Accounting policies applied Inventory remaining on statement of financial
position Inventory costs recognized in profit or loss
24
IAS 2 - Disclosure
Balance sheet related disclosures: Carrying amount in each category of
inventory (materials, WIP, finished goods, production supplies, merchandise) and in total
Carrying amount of any inventory measured at fair value less costs to sell
Carrying amount of inventory pledged as collateral for liabilities
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IAS 2 - Disclosure
Income statement related disclosures: Amount of inventory recognized as an
expense (usually cost of sales/cost of goods sold)
Amount of write-downs to NRV or other losses
Amount of any write-down reversals Circumstances that resulted in reversals
26
Current GAAP Comparisons
Pages 104, 122 & 146 of 164 ofhttp://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).pdf
27
IFRS Financial Statement DisclosuresSiemens AGhttp://w1.siemens.com/annual/07/pool/download/pdf_finanzinfo/e07_03_financial_statements.pdf
Statement of income page 01 of 118
Statement of fin’l positionpage 03 of 118
Accounting policy note page 20 of 118
Inventory note page 42 of 118
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Looking Ahead
There is nothing on the IASB’s current agenda that directly involves potential changes to IAS 2 Inventories
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End-of-Chapter Practice
7-1 The following costs have been incurred by a manufacturer of small leather goods:
1.Hides of various leather2.Dyes to color the leather3.Warehouse costs to store the dyed leather while drying4.Patterns and dies used to guide the cutting of the pieces into the desired shape5.The salary of the plant manager’s administrative assistant6.Costs of the warehouse to store finished goods7.Under-applied factory overhead
InstructionsDetermine whether the cost of each of the above items is included in the cost of inventory. Provide a brief explanation of
your answer for each.
30
End-of-Chapter Practice
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End-of-Chapter Practice
32
End-of-Chapter Practice
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End-of-Chapter Practice
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