Overview of session
1. Introduction – scope and definitions
2. Measurement
3. Recognition
4. Disclosure
5. Other Issues
Slide 2
1. Introduction – scope and
Scope of IAS 2
Covers all inventories other than:
WIP under construction contracts
Financial instruments (Not in IGAAP)
Agricultural and forest products (Not in IGAAP)
Mineral ores and biological assets to the extent they are
measured at NRV (IFRS excludes only measurement of
Commodity broker traders when measured at fair value
less costs to sell
Additionally, IGAAP exempts WIP of service providers also
Slide 4
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
Slide 5
Measured at lower of :
Cost and Net Realisable Value
Raw Materials
Work in Progress
Finished Goods
Slide 6
NRV vs Fair value
NRV is entity specific value, Fair value is not
NRV may not equal fair value less costs to sell
Slide 7
2. Measurement
Net Realisable Value
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
Selling Price
Trade Discounts
Costs to Completion
Marketing, Selling and
Distribution Costs
Net Realisable Value
Slide 9
Cost of Production:
Cost of
Cost of
Slide 10
Cost Formulas
Specific identification
Benchmark Treatment:
• First in First Out (FIFO) formula
• Weighted Average Cost formula
Slide 11
Use of cost formula
Same cost formula for all inventories having a similar nature and
use to the entity
Inventories with a different nature or use, different cost formula
may be justified
IGAAP does not provide any specific guidance
Slide 12
Deferred settlement terms
Financing element i.e. difference between purchase price for
normal credit terms and the amount paid is recognised as
interest expense over the period of financing.
IGAAP does not specify this treatment
Slide 13
3. Recognition
Inventory is expensed…
…when the related revenue is recognised
The expense of a write down to NRV is recognised…
…when the write down occurs
Reversal of write down when
• Circumstances that caused write down no longer exist
• Increase in NRV due to changed economic circumstances
IGAAP does not provide above guidance
Slide 15
4. Disclosures
Disclosures in IGAAP and IFRS
Accounting policies including the cost formula
Total carrying amount
Carrying amount in appropriate classifications
Slide 17
Additional disclosures in IFRS
Carrying amount of inventories carried at fair value less costs to
Amount of inventories recognised as expense during the period
Amount of write down recognised
Amount of reversal of write down
Circumstances or events that led to reversal of write down
Carrying amount pledged as security for liabilities
Slide 18
5. Other Issues
Service providers
Para 8 specify that in case of service providers, inventories
include the cost of services
Para 19 provides guidance on cost of inventories of service
provider. Measured at cost of production. Does not include non
attributable overheads even though included into price charged
by service providers.
Para 29 provides guidance on determination of NRV for service
providers. Each service for which a separate selling price is
charged is treated as a separate item.
Slide 20
Machinery spares
Guidance now contained in AS 10 Accounting for fixed assets
Slide 21
Thank You
Slide 22