Philippine Accounting Standards 2 - Inventories

PAS 2- INVENTORIES
 It prescribes the accounting treatment for inventories;

 It gives guidance on determining the cost of inventories and their subsequent
recognition as an expense;
 It prescribes the measurement rules including the net realizable value
 It gives guidance on the cost formulas (FIFO and weighted average).
 It is relatively easy to apply
Scope
Inventories include assets held for sale in the ordinary course of business (finished
goods), assets in the production process for sale in the ordinary course of business
(work in process), and materials and supplies that are consumed in production (raw
materials). [IAS 2.6]
However, IAS 2 excludes certain inventories from its scope: [IAS 2.2]
 work in process arising under construction contracts (see IAS 11 Construction
Contracts)
 financial instruments (see IAS 39 Financial Instruments: Recognition and
Measurement)
 biological assets related to agricultural activity and agricultural produce at the
point of harvest (see IAS 41 Agriculture).
Also, while the following are within the scope of the standard, IAS 2 does not apply to
the measurement of inventories held by: [IAS 2.3]
 producers of agricultural and forest products, agricultural produce after harvest,
and minerals and mineral products, to the extent that they are measured at net
realisable value (above or below cost) in accordance with well-established
practices in those industries. When such inventories are measured at net
realisable value, changes in that value are recognised in profit or loss in the
period of the change
 commodity brokers and dealers who measure their inventories at fair value less
costs to sell. When such inventories are measured at fair value less costs to sell,
changes in fair value less costs to sell are recognised in profit or loss in the
period of the change.
Fundamental principle of IAS 2

Inventories are required to be stated at the lower of cost and net realisable value (NRV).
Measurement of inventories
Cost should include all:
 costs of purchase (purchase price, import duties, irrecoverable taxes, freight,
handling costs) and other cost directly attributable to the acquisition, net of trade
discounts and rebates received
 costs of conversion (direct materials, direct labor, including fixed and variable
manufacturing overheads) and
 other costs incurred in bringing the inventories to their present location and
condition (design specifications)
Inventory cost should not include:

 abnormal waste (materials
 storage costs (unless necessary for furtherance of production process)
o Storage cost of goods in production is CAPITALIZED
o Storage cost on finished goods is EXPENSED
 administrative overheads unrelated to production
 selling costs
 distribution cost
 foreign exchange differences arising directly on the recent acquisition of
inventories invoiced in a foreign currency
 interest cost when inventories are purchased with deferred settlement terms.
 The standard cost and retail methods may be used for the measurement of cost,
provided that the results approximate actual cost.]
 For inventory items that are not interchangeable, specific costs are attributed to
the specific individual items of inventory.
 For items that are interchangeable, IAS 2 allows the FIFO or weighted average
cost formulas. The LIFO formula, which had been allowed prior to the 2003
revision of IAS 2, is no longer allowed.
 The same cost formula should be used for all inventories with similar
characteristics as to their nature and use to the entity. For groups of inventories
that have different characteristics, different cost formulas may be justified.
FIFO (First in- First Out)

 The goods first purchased are first sold
 Ending inventory is expressed in terms of recent purchases or new prices
 While COGS is representative of earlier or old prices.
 It favors the balance sheet, in that inventory is stated at current replacement cost
 Improper matching of cost against revenue. It results to understatement of COGS
 In period of inflation, FIFO would yield to highest income
 In period of deflation, FIFO would yield to lowest income.
Weighted average
 The cost of beginning inventory plus the total cost of purchases during the period
is divided by the total units purchased plus those in the beginning inventory to get
a weighted average unit cost.
 Total cost of GAS divided by total units of GAS
 It produces inventory valuation that approximates current value if there is a rapid
turnover of inventory.
 It may be have a considerable lag between the current cost and inventory
valuation since the average unit cost involves early purchases.
LIFO (Last in, First Out)

 Goods last purchased are first sold
 Goods remaining in the inventory are those first purchased
 COGS is representative of the recent or new prices
 LIFO favors the income statement because there is a matching cost against
revenue
 There may be a considerable lag between inventory valuation and current
replacement cost
 In period of inflation, FIFO would yield to lowest income
 In period of deflation, FIFO would yield to highest income.
Specific identification
 Specific costs are attributed to identified items of inventory
 Cost of inventory is determined by simply multiplying the units on hand by the
actual unit cost.
 This method is appropriate for inventories that are segregated for a specific
project and inventories that are not ordinarily interchangeable.
Measurement of inventory
 Inventories shall be measured at the lower of cost and net realizable value.
Write-down to net realisable value

NRV is the estimated selling price in the ordinary course of business, less the estimated
cost of completion and the estimated costs of disposal.
Accounting for inventory writedown

 If the cost is lower than net realizable value, there is no accounting problem
because it is stated in cost and the increase in value is not recognized.
 Is the NRV is lower than cost, the inventory is measured at NRV.
Allowance method
 The inventory is recorded at cost and any loss on inventory writedown is
accounted for separately.
Loss on inventory writedown xx

Allowance for inventory writedown xx
 This allowance is adjusted upward or downward depending on the difference

between the cost and the NRV at year end.
 If the required allowance increases, additional loss is recognized

Loss on inventory writedown xx
 If the required allowance decreases, gain on reversal of inventory is recognized.

Gain on reversal of inventory writedown xx
 The gain is limited to the extent of the allowance balance.
 Loss on inventory writedown is included in the computation of COGS.
 The allowance for inventory writedown is presented as a deduction from

inventory.
Any write-down to NRV should be recognised as an expense in the period in which the
write-down occurs. Any reversal should be recognised in the income statement in the
period in which the reversal occurs.
Expense recognition
IAS 18 Revenue addresses revenue recognition for the sale of goods. When inventories
are sold and revenue is recognised, the carrying amount of those inventories is
recognised as an expense (often called cost-of-goods-sold). Any write-down to NRV
and any inventory losses are also recognised as an expense when they occur.
Disclosure
Required disclosures: [IAS 2.36]
 accounting policy for inventories
 carrying amount, generally classified as merchandise, supplies, materials, work

in progress, and finished goods. The classifications depend on what is
appropriate for the entity
 carrying amount of any inventories carried at fair value less costs to sell
 amount of any write-down of inventories recognised as an expense in the period
 amount of any reversal of a write-down to NRV and the circumstances that led to
such reversal
 carrying amount of inventories pledged as security for liabilities
 cost of inventories recognised as expense (cost of goods sold).
IAS 2 acknowledges that some enterprises classify income statement expenses by

nature (materials, labour, and so on) rather than by function (cost of goods sold, selling
expense, and so on). Accordingly, as an alternative to disclosing cost of goods sold
expense, IAS 2 allows an entity to disclose operating costs recognised during the period
by nature of the cost (raw materials and consumables, labour costs, other operating
costs) and the amount of the net change in inventories for the period). [IAS 2.39] This is
consistent with IAS 1 Presentation of Financial Statements, which allows presentation of
expenses by function or nature.
Example of cost formulas:

Philippine Accounting Standards 2 - Inventories

Uploaded by

Copyright:

Available Formats

Philippine Accounting Standards 2 - Inventories

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Philippine Accounting Standards 2 - Inventories

Uploaded by

Copyright:

Available Formats

PAS 2- INVENTORIES

 It prescribes the accounting treatment for inventories;

Fundamental principle of IAS 2

Inventory cost should not include:

FIFO (First in- First Out)

LIFO (Last in, First Out)

Write-down to net realisable value

Accounting for inventory writedown

Loss on inventory writedown xx

 This allowance is adjusted upward or downward depending on the difference

 If the required allowance increases, additional loss is recognized

 If the required allowance decreases, gain on reversal of inventory is recognized.

 The gain is limited to the extent of the allowance balance.

 Loss on inventory writedown is included in the computation of COGS.

 The allowance for inventory writedown is presented as a deduction from

 carrying amount, generally classified as merchandise, supplies, materials, work

 amount of any write-down of inventories recognised as an expense in the period

 carrying amount of inventories pledged as security for liabilities

 cost of inventories recognised as expense (cost of goods sold).

IAS 2 acknowledges that some enterprises classify income statement expenses by

Example of cost formulas:

You might also like