IAS – 02 : INVENTORIES
Para
Scope
Para 02
Explanation
IAS 02 will not apply for IAS 32, IFRS 09, IAS 41 biological assets related to
agricultural activity and agricultural produce at the point of harvest.
Definition
Para 06
Inventories are assets:
- Held for sale in the ordinary course of business
- In the process of production for such sale, or
- In the form of materials and supplies to be consumed in the production (i.e
spare parts)
Measurement of Inventories
Para 09
- Initial cost should be recorded at cost
- Subsequently Inventories shall be measured at the lower of cost and net
realizable value.
Cost of Inventories
Para 10
Cost includes:
- Purchase
- Conversion cost
- All other cost incurred in bringing the inventories to their present location and
condition.
Cost of Purchase
Para 11
Purchase cost = Purchase price + import duties and taxes + direct expenses –
Trade discounts and rebates
Cost of Purchase
Conversion cost = It consists of two main parts: a. Cost directly related to units
of production e.g. Direct material and labour b. Fixed and variable production
overheads that are incurred in converting the materials into finished goods,
allocated on a systematic basis.
Para 12Para 14
Note: Fixed production overhead must be allocated to the items of inventory
based on normal capacity of the production facilities. Any abnormal wastage or
unallocated overhead must be recognized as expense. Normal capacity is the
expected achievable production under normal circumstances.
Other Cost
Any other costs should only be recognized if they are incurred in bringing the
Para 15
inventories to their present location and condition.
The following costs are not recorded in inventory cost and will be expensed:
Abnormal wastage, Storage cost after production, administrative overhead not
Para 16
incurred in bringing the inventories to their present condition and location,
selling costs.
Para 17 Borring Cost (IAS 23) for qualifying asset.
Para 18
Financing Charge if there is anything is any financing element on deferred
settlement payment terms will charged as interest expenses rather than inventory.
MD. SHARIF MAHMUD, PH# 01824214658
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IAS – 02 : INVENTORIES
Para
Explanation
For example, A company purchases inventory worth Taka 10,000 with a deferred
settlement period of 12 months. Normally, the credit terms would be 12 months
without interest, but the company agrees to pay Taka 10,200 after 12 months.
The extra Taka 200 represents a financing charge.
Initial
Dr. Inventory
Cr. Accounts Payable
10,000
10,000
Transfer Interest on monthly basis till payment made i.e (16.67 x 12)
Dr. Interest Expense
200
Cr. Accounts Payable
200
Cost of agricultural produce harvested from biological assets
Para 20
biological assets are measured on initial recognition at their fair value less costs
to sell at the point of harvest.
For example, An entity harvests 1,000 kilograms of bananas. The fair value less
costs to sell per kilogram at the date of harvest is $2.50. The costs to sell (e.g.,
transportation, packaging) amount to $0.20 per kilogram.
Fair value less costs to sell per kg=Fair value−Costs to sell=$2.50−$0.20=$2.30
Total inventory value at harvest = =1,000 kg X $2.30=$2,300
The agricultural produce (bananas) is measured at $2,300 on initial recognition,
which is the fair value less costs to sell at the point of harvest.
Net Realisable Value
Para 28 – Closing inventories should be valued at the lower of Cost or Net Realizable
Para 33
Value.
NRV = Estimated selling price in the ordinary course of business - the
estimated cost of completion and the estimated cost necessary to make the
sale.
NRV will be lesser because of any damage, obsolescence, and physical
deterioration, management's decision to sell the product at a loss, errors in
production or purchasing.
Effects of IAS 21 in Inventory valuation:
The carrying amount of inventories is the lower of cost and net realisable value in accordance
with IAS 2, Inventories. The carrying amount in the functional currency is determined by
comparing:
(1) the cost, translated at the exchange rate at the date when that amount was determined;
and
(2) the net realisable value, translated at the exchange rate at the date when that valuewas
determined (eg, the closing rate at the reporting date).
MD. SHARIF MAHMUD, PH# 01824214658
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IAS – 02 : INVENTORIES
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IAS – 02 : INVENTORIES
Illustrative Examples:
Source : ICAEW FAR Question Bank 2023
Q-2(7) The inventory count at 31 December 2011 showed that there were 1,500 finished units
held in Giyani plc’s warehouse. 10,000 units were completed during the year, although planned
production was 12,000. Production had been halted for two weeks due to a fault on the
production line.
Direct Costs
176,000, Fixed Production Overheads 153,600
Solution
Cost per unit
Per unit (176,000/10,000)
Fixed production overheads
17.60
(153,600)
Per unit (153,600/12,000)
12.80
Total Cost per unit
30.40
Allocation of Fixed Production overheads
Total Fixed Production Overhead
153,600
Included in Inventory (12.80x10,000)
128,000
Charge to profit and loss
25,600
Q-4(7)
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IAS – 02 : INVENTORIES
Q
Solution:
Q-12
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IAS – 02 : INVENTORIES
Solution:
Question 18
Solution:
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IAS – 02 : INVENTORIES
Question 22
Solution:
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IAS – 02 : INVENTORIES
Question 54
Solution:
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IAS – 02 : INVENTORIES
Question – 59
Solution:
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IAS – 02 : INVENTORIES
MD. SHARIF MAHMUD, PH# 01824214658 10
IAS – 02 : INVENTORIES
ICAB Corporate Reporting
Nov Dec-2022
Solution:
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IAS – 02 : INVENTORIES
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IAS – 02 : INVENTORIES
MIND MAP
Source: Bilal Khalid Khan, FCA
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