Ind_AS_2_-_IIndAS-2 Inventory and their concept with regards to valuation and various concepts relate to.It is prepared by considering all relevant rules and regulations.NVENTORIES[1].pptx

IndAS-2 Inventory and their concept with regards to valuation and various concepts relate to.It is prepared by considering all relevant rules and regulations.

1. IND AS 2 - INVENTORIES Presented by Nomita Kujur Deepak Mohapatra Sanjana Behera Sweta Panda

2. Objectives The objectives of this standard is to prescribe the accounting treatment for inventories . To formulates the method of computation of cost of inventories. To determines the value of inventory at which it is to be shown in balance sheet.

3. RELEVENT DEFINITION Inventories Consists of the following : Held for sale in the ordinary course of business (Finished goods) In the process of production for such sale (work in progress) In the form of materials or suppliers to be consumed in the production process or in the rendering of services.(Raw material)

4. Inventories are assets In the process of production for such sales In the form of materials and suppliers to be consumed in the production process or in the rendering of services Held for sale in the ordinary course of business

5. Inventories shall be classified as :- Raw material Work in progress Finished goods Stocks in trade Store & spares Loose tools

6. Scope of IND AS 2 This standard is applicable to all inventories, except 1. Work in progress under construction contract. 2. Financial instruments( covered by IND AS 32 & IND AS 109 ) 3. Biological assets ( Living animals and plants) 4. Agricultural products 5. Forest products 6. Commodity broker – traders ( They measures their inventories at Fair value )

7. Measurement of inventories/ Valuation of Inventories Inventories Should be valued at fair value and Net Realizable value ( NRV). *NRV (Net Realizable value) NRV refers to the net amount that an entity expects to realise the sale of inventory in the ordinary course of business Estimated selling price Less : Estimated Selling expenses Less : Estimated cost of completion (WIP) NRV XXX XXX XXX XXX

8. Fair value (FV) It is the price that would be received to sell an assets on paid to transfer a liability in an orderly transaction between market participants at the measurement date . ( IND AS 113 , Fair value measurement )

9. Measurement of inventories Inventories shall be measured at the lower of cost and net realisable value . [A]Determine the cost of inventories [B]Determine the net realizable value of inventories [A]Cost of inventories :- The 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 purchase Cost of purchase comprises of – a) Purchase price b) Import duties and other taxes c) Transport and handling charges d) Other costs to bring inventory to present location and condition e) Less trade discounts , rebates and other similar items

11. Cost of conversions The cost of conversion of inventories include costs directly related to the units of production , such as :- Direct material Direct labour Other direct cost

12. It also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads : those indirect costs of production that remain relatively constant regardless of the volume of production and allocated based on normal capacity of production E.g (depreciation and maintenance of factory buildings and equipment, and the cost of factory management and administration). Normal capacity : It is the production expected to be achieved on average over a number of periods or seasons under normal circumstances. Allocation of fixed production overhead cost : When production level is abnormally low : unallocated overhead are recognized as an expenses in the period in which they are occurred. When production level is abnormally high : the amount of fixed overhead allocated to each unit of production is decreased. FIXED OVERHEAD PER UNIT = Fixed overhead/Normal capacity

13. Variable Production Overhead : Variable overhead is allocated to each unit of production on the basis of actual production.It always depends upon the production. VARIABLE OVERHEAD PER UNIT: Variable overhead/Actual production

14. Case study Particulars Amounts Direct Material Direct Labour Direct Expenses Production Overheads Fixed Variable 50,000 10,000 20,000 15,000 10,000 The firms normal capacity of production is 10,000 units . The firm has produced 5000 units , out of these units it sold 4000 units . Calculate cost of inventory ( Inventory is 1000 units ) ?

15. ParticularsPP Amounts Direct Material Direct Labour Direct Expenses 50,000 10,000 20,000 Prime cost 80,000 Add : Production Overhead Fixed ( 15,000/10,000)= 1.5 1.5 x 5000 7,500 Variable ( 10,000 / 5,000 ) = 2 2 x 5000 10,000 Total cost 97,500 Total cost of Inventory ( 97,500 / 5000 ) = 19.50 Cost of 1000 units of inventory ( 1000 x 19.50 ) 19,500

16. When more than one product is produced in the process JOINT PRODUCT COST : When cost of conversion of each product is not separately identifiable : The total cost of conversion is allocated between the products on the ratio of sale value of each product. When cost of conversion of each product is separately identifiable : The conversion cost is separately allocated to the respective product. MAIN PRODUCT WITH A BY-PRODUCT OR ANY SCARP : When by-products is immaterial : In this case, by-products or scarp are often measured at net realisable value and this value is deducted from the cost of the main product. When by-products is material : By-products is treated as joint products

17. Case study

18. Solution Calculation of NRV of By-product Selling price of by-product 2000 units x 20 40,000 Less : Processing charges of by-product (8,000) Packing charges (2,000) NRV of By-product 30,000

19. Calculation of cost of conversion for allocation between joint product MP 1 and MP2 Raw material Wages Fixed overhead Variable overhead 150,000 90,000 65,000 50,000 Less : NRV of by-product BP Sale value of scrap 30,000 5,000 (35,000) Joint cost to be allocated between MP1 and MP2 320,000

20. Determination of basis for allocation of joint cost to MP1 and MP2 Output in units (a) Sales price per unit (b) Sales value ( axb ) Ratio of allocation Joint cost of 320,000 allocated in the ratio of 3:2 (c) MP1 5,000 60 300,000 3 192,000 MP2 4,000 50 200,000 2 128,000 Cost per unit ( c / a ) 38.4 32

21. Determination of value of closing stock of MP1 and MP2 Particulars MP 1 MP 2 Closing stock in units Cost per unit Value of closing stock 250 38.4 9600 100 32 3200

22. Other costs Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. Borrowing costs (As per Ind AS-23) It may be appropriate to include non-production overheads or the costs of designing products for specific customers in the cost of inventories. Cost excluded from inventory costs and recognised as expenses in the period in which they are incurred : Abnormal amounts of wasted materials, labour or other production costs Storage costs Administrative overhead Selling and distribution overhead

23. [B] Net realizable value NRV = [ Estimated selling price in the ordinary course of business – Estimated cos of completion – Estimated cost necessary to make the sale ]

24. Cost Formula/Method

25. Techniques of Inventory Valuation First-In, First-Out(FIFO) Weighted Average Method Retail Method Standard Cost Specific Identification Method

26. Calculation of cost of inventories Opening stock(Raw Materials)=1000@2 Purchase 1 st lot =2000 units@ 2.5 2 nd lot=4000 units@ 3 3 rd lot=3000 units@ 3.5 4 th lot=1000 units@4 Raw Material Consumed=8000 units Closing Stock=3000 units

27. First-In, First-Out Items of inventory that were purchased or produced first are sold first.

28. Weighted Average It involves computation of an average unit cost by dividing the total cost of units by the number of units. Suitable where inventory units are identical or nearly identical .

29. Last-In ,First-Out It is not acceptable cost formula under Ind AS 2.

30. Retail Method The cost of inventory is determined by reducing sales value of the inventory by appropriate percentage gross margin.

31. Standard Cost Cost is based on normal levels of materials and supplies, labour efficiency and capacity utilization. They are regularly reviewed and revised where necessary.

32. Special Identification Method Specific identification of cost means that specific costs are attributed to identified items of inventory.

33. RECOGNITION OF INVENTORY The recognition of inventory : As an expense As an asset AS AN EXPENSES When inventory is sold, the carrying amount is recognized as an expense in the period in which revenue is recognized. Any write-down to NRV and all losses are recognized as an expense in the period the write-down / loss occurs. REVERSAL OF WRITE-DOWN : Any reversal of write-down is recognized as reduction in expense in the period reversal occurs. In other words, any reversal of write-down is recognized as income in the period reversal occurs. It is restricted to the amount of write-down.

34. RECOGNITION OF INVENTORY AS AN ASSET : The inventory is recognized as an asset until the company bears the risk and benefits from the rewards of ownership.

35. The Financial Statements shall disclose: 1. ACCOUNTING POLICIES : The accounting policies adopted in measuring inventories, including the cost formula used. If there’s a change in the cost formula, that change should be disclosed along with the reasons. 2. ANALYSIS OF CARRYING AMOUNT : We shall disclose the total carrying amount of inventories (of major categories like RM, WIP & FG) (carrying amount of inventory is the value at which it is recorded on the balance sheet i.e. lower of cost or NRV) 3. INVENTORIES CARRIED AT FAIR VALUE LESS COST TO SELL : Carrying amount of inventories carried at fair value less costs to sell. DISCLOSURE IN THE FINANCIAL STATEMENTS

36. DISCLOSURE IN THE FINANCIAL STATEMENTS 4. AMOUNTS RECOGNISED IN PROFIT OR LOSS STATEMENT : the carrying amount of inventories recognized as an expense when the inventory is sold during the period the amount of any write-down of inventories recognized as an expense (write-down may occur due to obsolescence, damage, or decline in the market value) and the amount of any reversal of any write-down is recognized as an income. 5. INVENTORIES PLEDGED AS SECURITY: The carrying amount of inventories pledged as security for liabilities

37. IND AS 2 VS IAS 2 IND AS recognizes nature wise classification of expenses but IFRS/IAS recognizes both function as well as nature wise classification of expenses. ( the function wise classification of expenses is carved out in IND AS.) Under IND AS, where the inventory is recognized as an expense on the basis of nature, inventory is recognized as “changes in inventories.” Under IFRS/IAS, where the inventory is recognized as an expense on the basis of function apart from the nature wise classification, inventory is recognized as “cost of sale.”

38. BASIS IND AS 2 AS 2 Scope and applicability Applicable to Indian companies as specified by MCA, mainly for listed companies and other large entities. Applicable to all enterprises in India, providing guidelines for inventory valuation in a broader context Disclosure Typically requires more comprehensive disclosure. Relatively less disclosure Complexity and detail Provides more detailed guidance on aspects like determination of NRV, cost formulas, handling of different types of costs. Less detailed guidance as compared to Ind AS 2. Subsequent recognition Deals with the subsequent recognition of cost/ carrying amount of inventories as an expense It does not provide the same. SIGNIFICANT DIFFERENCE BETWEEN IND AS 2 & AS 2

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