international accounting standards IAS 02.

material for IFRS

1. IAS 02: INVENTORIES Phạm Hiếu

2. LEARNING OBJECTIVES 2 Understanding definition of IAS 02 Determinating the cost of inventories Acknowledging formulas for Inventory – valuing Disclosure requirements for Inventories

3. History of IAS 2 3 1 3 5 4 2 September 1974 August 1991 December 1993 IAS 9 (1993) Inventories issued October 1975 IAS 2 issued 18 December 2003 IAS 2  Inventories   issued Exposure Draft E2 Exposure Draft E38 Inventories published

4. DEFINITION Inventories include assets Held for sale In the production process for sale Raw materials and supplies (In production ) 4

5. Inventories exclude : Work in process arising under construction contracts (see  IAS 11   Construction Contracts ) Financial instruments ( see IAS 39/ IFRS 9) Biological assets related to agriculture (IAS 41) DEFINITION 5

6. MEASUREMENT OF INVENTORIES Cost should include: Costs of purchase Cost of conversion Other costs incurred in bringing the inventories to their present location and condition 6

7. MEASUREMENT OF INVENTORIES Cost of purchase : = Purchase price + Import duties and other taxes + Transport, handling and other directly attributable costs to the acquisition - Trade discount - Rebates 7

8. MEASUREMENT OF INVENTORIES Cost of conversion Direct costs ( direct material + direct labour ) Indirect costs ( Fixed manufacturing overheads + variable manufacturing overheads ) 8 Note : Fixed manufacturing overheads must be allocated on the basis of the normal capacity of the production facilities

9. MEASUREMENT OF INVENTORIES Other costs Non- production overheads The cost of designing products for specific customers Note : In some cases , borrowing costs (interest) can be included in cost of inventories (IAS 2.17 and IAS 23.4) 9

10. MEASUREMENT OF INVENTORIES Inventory cost should not include Abnormal waste Storage costs Administrative overheads unrelated to production Selling costs Foreign exchange differences arising directly Interest cost when inventories are purchased with deferred settlement terms 10

11. TECHNIQUES FOR MEASUREMENT COST Standard costs : Are set up to take account of normal production values Retail method : Widely used in retail industry , based on cost – to – retail ratio 11

12. 12 Example for retail method X Corporation sells home coffee roasters for an average of $200, and which cost it $140. Milagro’s beginning inventory has a cost of $1,000,000, it paid $1,800,000 for purchases during the month, and it had sales of $2,400,000. The calculation of its ending inventory is: Beginning inventory $1,000,000 + Purchases $1,800,000 = Goods available for sale $2,800,000 COGS $1,680,000 (2,400,000 x (140/200)) = Ending inventory $1,120,000

13. Cost Formulas First - in, First – Out (FIFO) Weighted – average cost (WAC) 13 Note : 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

14. Cost Formulas First – in, First – out (FIFO) This method assumes that the first unit acquired are the first unit sold The cost of ending inventories is that of the most recent purchases A major criticism of FIFO: Improper matching of cost with revenues since the cost of goods sold is computed on the bases of old price that are possibly unrealistic 14

15. 15 Example for FIFO Month Purchases Sales Balance Quantity Price ($) Value ($) Quantity Price ($) Quantity Price ($) Value ($) 01-Jan-22 50 5 250     50 5 250 25-Jan-22       30 5 20 5 100 02-Feb-22 60 6 360     20 60 5 6 460 28-Feb-22       50 20 x 5 30 x 6 30 6 180 03-Mar-22 100 8 800     30 100 6 8 980 30-Mar-22       80 30 x 6 50 x 8 50 8 400

16. Cost Formulas Weighted Average Cost (WAC) This method assumes that the goods available for the sale are homogeneous The average cost is computed by dividing the cost of goods available for sale by the number of the units available by sale The major criticism of WAC is that it assigns no more importance to current prices than to past prices paid several months ago 16

17. Net Realisable Value (NRV) NRV is defined as “estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale 17

18. 18 Measurement Initial Subsequently Cost of purchase + Cost of conversion + Other costs Retail Method Standard Cost Lower of Cost or NRV (Net realisable value) FIFO WAC Specific identification Estimated selling price – estimated costs

19. 19 Practice Question You are preparing the financial statements for a business. The cost of the items in closing inventory is $42,000. This includes some items which cost $2,000 and which were damaged in transit. You have estimated that it will cost $400 to repair the items, and they can then be sold for $1,200. What is the correct inventory valuation for inclusion in the financial statements Answer: $42,000 - $2,000 + ($1,200 - $400) = $40,800

20. 20 Company W sell three kinds of product, including Basic, Super and Luxury. The following information was available at the year end Basic $ per unit Super $ per unit Luxury $ per unit Original cost 16 25 33 Estimated selling price 19 32 30 Selling and distribution costs 2 8 10 units units units Units of inventory 200 250 150 What is the value of inventory at the year end?

21. 21 Cost Net realisable value Lower of cost & NRV Units Value $ $ $ $ Basic 16 17 16 200 3,200 Super 25 24 24 250 6,000 Luxury 33 20 20 150 3,000 12,200

22. 22 IAS 2 Inventories defines the items that may be included in computing the cost of an inventory of finished goods manufactured by a business. Which one of the following lists consists only of items which may be included in the cost of inventories, according to IAS 2 A. Supervisor’s wages, carriage inwards, carriage outwards, raw materials B. Raw materials, carriage inwards, costs of storage of finished goods, plant depreciation C. Plant depreciation, carriage inwards, raw materials, Supervisor’s wages D.Carriage outwards, raw materials, Supervisor’s wage, plant depreciation

23. 23 A company values its inventory using the first in, first out (FIFO) method. At 1 May 20X2 the company had 700 engines in inventory, valued at $200 per each. During the year ended 30 April 20X3 the following transactions took place: 20X2 1 July Purchased 600 engines at $250 each 1 November Sold 500 engines for $200,000 20X3 1 February Purchased 400 engines at $300 each 15 April Sold 350 engines for $175,000 What is the value of the company’s closing inventory of engines on 30 April 20X3? Solution: 450 x $250 + 400 x $300 = $232,500

24. 24 The information below relates to inventory item Y March 1 50 units held in opening inventory at a cost of $50 per unit 17 100 units purchased at a cost of $59 per unit 31 145 units sold at a selling price of $110 per unit Under Weighted Average Cost, what is the value of inventory held for item at the end of March 31?

25. 25 Date Unit Unit cost Cost of issues Balance in inventory 1-Mar 50 $ 50   $ 2,500 17-Mar 100 $ 59   $ 5,900   150 $ 56   $ 8,400           31-Mar -145 $ 56 -$ 8,120     5 $ 56   $ 280

26. 26 A company has following transactions with its product Z Jan 01 2021 Opening inventory: 0 unit Feb 01 2021 Buy 20 units at $700 per unit Mar 01 2021 Buy 25 units at $600 per unit Apr 01 2021 Sell 15 units at $1000 per unit Sep 01 2021 Buy 12 units at $500 per unit Dec 01 2021 Sell 24 units at $1000 per unit The company used periodic weighted average cost to value its inventory. What is the inventory value at the end of the year? Price per unit: (20 x $700) + ( 25 x $600) + (12 x $500) / (0+20+25+12) = ~$614 per unit Valuation of closing inventory: (20+25-15+12-24) x $614 = $11,052

27. Expense recognition 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 [IAS 2.34] 27

28. Disclosures 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 28

29. Disclosures 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). 29

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