The standard applies to all inventories except :
 Construction contracts


Financial instruments
Biological assets related to agricultural activity and agricultural produce at the point of harvest
 Measurement of inventories held by
 Producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products
 Commodity broker-traders

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 or supplies to be consumed in the production process or in the rendering of services

Inventories include raw material, WIP, finished goods, goods purchased for resale etc.

Inventory is measured at the lower of
Cost
 Includes all:
 Costs of purchase
 Costs of conversion
 Other costs incurred in bringing the inventories to their present location and condition
(Refer next slide)
Net realisable value (NRV)
Estimated selling price in the ordinary course of business
Less: estimated costs of completion and costs to make sale
Assets should not be carried in excess of amounts expected to be realised from sale/use
NRV is based on most reliable evidence at the time of estimation regarding amounts expected to be realised
Inventories are usually written down on an item by item basis*
Consider the purpose for which they are held*
(*Refer slide XX)

Cost
Purchase cost includes:
 Purchase price
 Duties and other taxes
 Freight inwards
 Other expenditure directly attributable to the acquisition
 VAT/CENVAT/Excise duty/Customs duty only if not subsequently recoverable
Excludes:
 Trade discounts
 Rebates
 Duty drawbacks
Cost of conversion includes:

Direct material, labour, other direct costs related to production

Overheads (fixed and variable production overheads)
 Absorption costing - absorb as per normal capacity

Other costs include interest and borrowing costs only in exceptional cases but not those for inventory routinely manufactured or otherwise produced in large quantities on a repetitive basis over a short period

Excludes:
 abnormal amounts of wasted material, labour or other production costs
 storage costs, unless necessary in the production process prior to a further production stage
 administrative overheads that do not contribute to bringing inventory to its present location & condition
 selling and distribution costs

 Where cost of conversion is not separately identifiable
 allocation on rational and consistent basis
 e.g., relative sales value of each product either
 at the stage when the products become separately identifiable or
 at completion of production
 If by-products, scrap and waste materials are immaterial
 value is measured at NRV and
 value is deducted from the cost of main product

 Average production over a number of periods / seasons
 under normal circumstances
 taking into account loss of capacity from planned maintenance
 Actual level may be used if it approximates normal capacity
 Abnormally high production
 fixed production overheads allocated to each unit of production is decreased so that inventories are not measured above cost
 variable production overheads are assigned to each unit of production on the basis of the actual use of the production facilities




Inventories are usually written down on an item by item basis
Sometimes appropriate to group related or similar items
 They relate to same product line that have similar end use and produced/marketed in same geographical area and cannot be practicably evaluated separately
 Should not be based on a broad classification of inventories e.g. finished goods or business segment
Estimates of NRV also take into consideration the purpose for which the inventory is held
 Quantities held to satisfy firm sales or service contracts
Quantity covered by contract: NRV is based on contract price
For excess quantities: NRV is based on general selling prices
 Materials/other supplies held for use in production:
Written down to NRV only if
- There is a decline in the price of materials AND
- Cost of finished products is expected to exceed NRV
Replacement cost may be the best available measure of NRV


Specific identification of items of inventory

Not ordinarily interchangeable
Segregated for specific project

Identified actual costs

Other items of inventory, apply either
 first-in, first-out = FIFO
 weighted average
Fairest approximation to present location and condition

FIFO: inventories purchased/produced first are sold first
 inventory is valued at costs of units most recently purchased/produced

Weighted average method requires inventory to reflect weighted average cost based on unit cost of both:
 units on hand at the beginning of the period, and
 units purchased (manufactured) during the period

Measurement Techniques

Measurement techniques include
 retail method
 standard cost

These techniques may be used for convenience if the results approximate cost
Consistency: Different Cost Formulae for Inventories

Same cost formula for all should be used for inventories of similar nature and use

Different cost formula may be justified for inventories with different nature and use
Apply treatment consistently once chosen

 When inventories are sold -

 Recognise carrying amount as an expense in the period in which the related revenue is recognised
 Matching of costs and revenue
When inventories are written down to NRV
 Recognise all losses of inventories as an expense in the period in which they occur
 Recognise reversals of write-downs as a reduction in the amount of inventories recognised as expense in the period in which reversal occurs

 Accounting policies for measuring inventories Including cost formulas used
 Carrying amounts of inventories, including classifications and inventories carried at fair value less costs to sell
 Amount of inventories recognised as an expense
 Write-down and reversals Recognised as expense and as reduction of expense respectively
 Circumstances or events that led to a reversal
 Carrying amount of inventories pledged