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    Review Materials: Prepared By: Junior Philippine Institute of Accountants UC-Banilad Chapter F.Y. 2019-2020

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    AB Cloyd
    This document provides an overview of International Accounting Standard 2 on Inventories. Some key points: - IAS 2 prescribes the accounting treatment for inventories and provides guidance on determining cost and its recognition as an expense. - Inventories must be measured at the lower of cost and net realisable value. Cost includes costs of purchase, costs of conversion, and other costs to bring inventories to their present location and condition. - Common costing methods include standard cost and retail method. Net realisable value is the estimated selling price less costs to complete and sell. - The objective is to present inventories at the lower of cost or net realisable value and

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    Review Materials: Prepared By: Junior Philippine Institute of Accountants UC-Banilad Chapter F.Y. 2019-2020

    Uploaded by

    AB Cloyd
    22 views22 pages
    This document provides an overview of International Accounting Standard 2 on Inventories. Some key points: - IAS 2 prescribes the accounting treatment for inventories and provides guidance on determining cost and its recognition as an expense. - Inventories must be measured at the lower of cost and net realisable value. Cost includes costs of purchase, costs of conversion, and other costs to bring inventories to their present location and condition. - Common costing methods include standard cost and retail method. Net realisable value is the estimated selling price less costs to complete and sell. - The objective is to present inventories at the lower of cost or net realisable value and

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    This document provides an overview of International Accounting Standard 2 on Inventories. Some key points: - IAS 2 prescribes the accounting treatment for inventories and provides guidance on determining cost and its recognition as an expense. - Inventories must be measured at the lower of cost and net realisable value. Cost includes costs of purchase, costs of conversion, and other costs to bring inventories to their present location and condition. - Common costing methods include standard cost and retail method. Net realisable value is the estimated selling price less costs to complete and sell. - The objective is to present inventories at the lower of cost or net realisable value and

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    22 views22 pages

    Review Materials: Prepared By: Junior Philippine Institute of Accountants UC-Banilad Chapter F.Y. 2019-2020

    Uploaded by

    AB Cloyd
    This document provides an overview of International Accounting Standard 2 on Inventories. Some key points: - IAS 2 prescribes the accounting treatment for inventories and provides guidance on determining cost and its recognition as an expense. - Inventories must be measured at the lower of cost and net realisable value. Cost includes costs of purchase, costs of conversion, and other costs to bring inventories to their present location and condition. - Common costing methods include standard cost and retail method. Net realisable value is the estimated selling price less costs to complete and sell. - The objective is to present inventories at the lower of cost or net realisable value and

    Copyright:

    © All Rights Reserved
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    Review Materials

    Prepared by:
    Junior Philippine Institute of
    Accountants UC-Banilad Chapter
    F.Y. 2019-2020
    International Accounting Standards 2
    Inventories

    .
    INTRODUCTION

    International Accounting Standard 2


    Inventories (IAS 2) replaces IAS 2
    Inventories (revised in 1993) and should be
    applied for annual periods beginning on or
    after 1 January 2005. Earlier application is
    encouraged. The Standard also supersedes
    SIC-1 Consistency—Different Cost Formulas
    for Inventories.
    3
    1 OBJECTIVE

    📍 is to prescribe the accounting treatment for inventories.


    A primary issue in accounting for inventories is the
    amount of cost to be recognised as an asset and carried
    forward until the related revenues are recognised.

    📍 provides guidance on the determination of cost and its


    subsequent recognition as an expense, including any write-
    down to net realisable value. It also provides guidance on
    the cost formulas that are used to assign costs to
    inventories.

    4
    SCOPE
    3 This Standard does not apply
    2 ThisStandard applies to all
    to the measurement of
    inventories, except:
    inventories held by:
    (a) work in progress arising under (a) producers of agricultural and forest
    construction contracts, including products, agricultural produce after
    directly related service contracts (see harvest, and minerals and mineral
    IAS 11 Construction Contracts); products, to the extent that they are
    measured at net realisable value in
    (b) financial instruments (see IAS 32 accordance with well-established
    Financial Instruments: Presentation, IAS practices in those industries. When such
    39 Financial Instruments: Recognition inventories are measured at net
    and Measurement and IFRS 9 Financial realisable value, changes in that value are
    Instruments); and recognised in profit or loss in the period
    of the change.
    (c) biological assets related to
    agricultural activity and agricultural (b) commodity broker-traders who
    produce at the point of harvest (see IAS measure their inventories at fair value
    41 Agriculture). less costs to sell. When such inventories
    are measured at fair value less costs to
    sell, changes in fair value less costs to sell
    5 are recognised in profit or loss in the
    period of the change.
    SCOPE

    4The inventories referred to in paragraph 3(a) are measured at net realisable


    value at certain stages of production. This occurs, for example, when
    agricultural crops have been harvested or minerals have been extracted and
    sale is assured under a forward contract or a government guarantee, or when
    an active market exists and there is a negligible risk of failure to sell. These
    inventories are excluded from only the measurement requirements of this
    Standard.

    5Broker-traders are those who buy or sell commodities for others or on their
    own account. The inventories referred to in paragraph 3(b) are principally
    acquired with the purpose of selling in the near future and generating a profit
    from fluctuations in price or broker-traders’ margin. When these inventories
    are measured at fair value less costs to sell, they are excluded from only the
    measurement requirements of this Standard.

    6
    DEFINITIONS

    6The following terms are used in this Standard


    with the meanings specified:

    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.
    7
    DEFINITIONS

    📍 Net Realisable Value 📍 Fair Value

    - is the estimated selling price in the - is the amount for which an asset
    ordinary course of business less could be exchanged, or a liability
    the estimated costs of completion settled, between knowledgeable,
    and the estimated costs necessary willing parties in an arm’s length
    to make the sale. transaction.
    - refers to the net amount that an - reflects the amount for which the
    entity expects to realise from the same inventory could be
    sale of inventory in the ordinary exchanged between
    course of business. knowledgeable and willing buyers
    - is an entity-specific value and sellers in the marketplace.
    - may not equal fair value less cost - Is not an entity-specific value
    to sell

    8
    DEFINITIONS

    Inventories include:
     goods purchased and held for resale including, for example,
    merchandise purchased by a retailer and held for resale, or
    land and other property held for resale.

     finished goods produced, or work in progress being produced,


    by the entity and include materials and supplies awaiting use
    in the production process.

     In the case of a service provider, the costs of the service, as


    described in paragraph 19, for which the entity has not yet
    recognised the related revenue (see IAS 18 Revenue).

    9
    MEASUREMENT AND COST OF INVENTORIES

    7Inventories shall be measured at the lower of cost


    and net realisable value.

    8The cost of inventories shall comprise all costs of


    purchase, costs of conversion and other costs
    incurred in bringing the inventories to their
    present location and condition.

    10
    COST OF INVENTORIES

    - comprise the purchase price, import duties and other taxes


    (other than those subsequently recoverable by the entity from
    the taxing authorities), and transport, handling and other costs
    Costs of purchase directly attributable to the acquisition of finished goods,
    materials and services. Trade discounts, rebates and other
    similar items are deducted.
    - include costs directly related to the units of production, such
    as direct labour.
    - include a systematic allocation of fixed and variable
    production overheads that are incurred in converting
    materials into finished goods.
    Fixed production overheads are those indirect costs of
    Costs of conversion production that remain relatively constant regardless of the
    volume of production, such as depreciation and maintenance of
    factory buildings and equipment, and the cost of factory
    management and administration. Variable production
    overheads are those indirect costs of production that vary
    directly, or nearly directly, with the volume of production, such
    as indirect materials and indirect labour.

    11
    COST OF INVENTORIES

    - included in the cost of inventories only to the extent that they are
    incurred in bringing the inventories to their present location and
    condition. For example, it may be appropriate to include non-production
    Other costs overheads or the costs of designing products for specific customers in the
    cost of inventories.

    Examples of costs excluded from the cost of inventories and recognised as expenses in the
    period in which they are incurred are:

    (a) abnormal amounts of wasted materials, labour or other production costs;


    (b) storage costs, unless those costs are necessary in the production process before a further
    production stage;
    (c) administrative overheads that do not contribute to bringing inventories to their present location
    and condition; and
    (d) selling costs.

    12
    TECHNIQUES FOR MEASUREMENT OF COST

    📍 Standard Cost Method 📍 Retail Method

    - is often used in the retail industry


    for measuring inventories of large
    numbers of rapidly changing
    - Standard costs take into account items with similar margins for
    normal levels of materials and which it is impracticable to use
    supplies, labour, efficiency and other costing methods. The cost
    capacity utilisation. They are of the inventory is determined by
    regularly reviewed and, if reducing the sales value of the
    necessary, revised in the light of inventory by the appropriate
    current conditions. percentage gross margin. The
    percentage used takes into
    consideration inventory that has
    been marked down to below its
    original selling price. An average
    13 percentage for each retail
    department is often used.
    NET REALISABLE VALUE

    The cost of inventories may not be recoverable if those inventories are


    damaged, if they have become wholly or partially obsolete, or if their
    selling prices have declined.
    The cost of inventories may also not be recoverable if the estimated
    costs of completion or the estimated costs to be incurred to make the
    sale have increased.
    The practice of writing inventories down below cost to net
    realisable value is consistent with the view that assets should
    not be carried in excess of amounts expected to be realised
    from their sale or use.
    14
    RECOGNITION AS AN EXPENSE

    When inventories are sold, the carrying amount of those


    inventories shall be recognised as an expense in the period
    in which the related revenue is recognised. The amount of
    any write-down of inventories to net realisable value and all
    losses of inventories shall be recognised as an expense in the
    period the write-down or loss occurs. The amount of any
    reversal of any write-down of inventories, arising from an
    increase in net realisable value, shall be recognised as a
    reduction in the amount of inventories recognised as an
    expense in the period in which the reversal occurs.
    15
    DISCLOSURE

    The financial statements shall disclose:

    (a) the accounting policies adopted in measuring inventories,


    including the cost formula used;

    (b) the total carrying amount of inventories and the carrying amount
    in classifications appropriate to the entity;

    (c) the carrying amount of inventories carried at fair value less costs to
    sell;

    (d) the amount of inventories recognised as an expense during the


    period;

    16
    DISCLOSURE

    The financial statements shall disclose:

    (e) the amount of any write-down of inventories recognised as an


    expense in the period in accordance with paragraph 34;

    (f) the amount of any reversal of any write-down that is recognised as


    a reduction in the amount of inventories recognised as expense in the
    period in accordance with paragraph 34;

    (g) the circumstances or events that led to the reversal of a write-down


    of inventories in accordance with paragraph 34; and

    (h) the carrying amount of inventories pledged as security for


    liabilities.
    17
    📝 REMEMBER:

    Information about the carrying amounts held in different classifications


    of inventories and the extent of the changes in these assets is useful to
    financial statement users. Common classifications of inventories are
    merchandise, production supplies, materials, work in progress and
    finished goods. The inventories of a service provider may be described
    as work in progress.

    The amount of inventories recognised as an expense during the period,


    which is often referred to as cost of sales, consists of those costs
    previously included in the measurement of inventory that has now been
    sold and unallocated production overheads and abnormal amounts of
    production costs of inventories.

    Some entities adopt a format for profit or loss that results in amounts being
    disclosed other than the cost of inventories recognised as an expense during the
    period. Under this format, an entity presents an analysis of expenses using a
    classification based on the nature of expenses. In this case, the entity discloses
    the costs recognised as an expense for raw materials and consumables, labour
    costs and other costs together with the amount of the net change in inventories
    18 for the period.
    SUMMARY

    19
    End of IAS 2
    Please see complementary test bank for
    conceptual questions.

    20
    Dear, you.
    Always be in pursuit for
    the one you have not yet
    become. Keep going!
    Love,
    Your UCB-JPIA family

    21
    Reference:
    • IASCF
    • Hernani, Christopher (summary)
    22

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