PAS 2 INVENTORIES
Learning Objective
Understand the meaning of inventory
Identify the items included in inventory cost
Identify the cost formulas by IFRS
To know the measurement of inventory in
the statement of financial position
To apply the LCNRV
Nature
IAS 2, par 6 states that inventories are
assets of the enterprise, which are
1. Held for sale in the ordinary course
of business
2. In the process of production for such
sales; or
3. In the form of materials or supplies
to be consumed in the production
process or in the rendering of
services
Trade discounts, rebates and other similar
items are deducted in determining the cost
of purchase
COST OF CONVERSION
• Direct labor
• Fixed overhead
• Variable overhead
EXCLUSION
• Abnormal cost of wasted materials,
labor and production cost
• Storage cost, unless necessary in
the production process prior to a
further production stage
• Administrative overhead
• Distribution or selling costs
COST FORMULA
• FIRST IN, FIRST OUT
• WEIGHTED AVERAGE
SPECIFIC IDENTIFICATION
 Specific cost are attributed to
identified items in inventory.
 Appropriate for inventories that are
segregated for a specific project and
inventories that are not ordinarily
interchangeable
COST OF INVENTORIES
• COST OF PURCHASE
• COST OF CONVERSION
• OTHER COST INCURRED IN
BRINGING THE INVENTORY TO
THEIR PRESENT LOCATION AND
CONDITION
COST OF PURCHASE
• Purchase price
• Import duties
• Irrecoverable taxes
• Freight
• Handling
• Other cost directly attributable to the
acquisition of finished goods
materials and services
Measurement
 LCNRV
Net Realizable Value
Estimated selling price
Less estimated cost of completion
Less estimated cost of disposal
Net Realizable Value
May not be recoverable
1. Damaged
2. Wholly or partially obsolete
3. Selling price decline
4. Estimated cost of completion or
disposal has increased
Accounting for Inventory Writedown
Rule:
Cost < NRV = no accounting problem
Cost > NRV = inventory is measured at net
realizable value
Allowance method
Inventory – cost
xxx
Allowance for inventory writedown
Net realizable value
xxx
xxx
“Loss in inventory writedown is included in
the COGS”
Recap
Explain investment in associate and how it
is accounted.
Explain inventories and how it is measured
in the statement of financial position.