Inventories: IAS 2

Wiecek and Young

IFRS PrimerChapter 7

2

Inventories

Related standards IAS 2 Current GAAP comparisons IFRS financial statement disclosures Looking ahead End-of-chapter practice

3

Related Standards

FAS 151 Inventory costs—an amendment of ARB 43

ARB 43 Inventories

4

Related Standards

IAS 11 Construction contracts IAS 32 Financial instruments: presentation IAS 39 Financial instruments: recognition and

measurement IAS 41 Agriculture

5

IAS 2 - Overview

Objective and scope Measurement Expense recognition Disclosure

6

IAS 2 - Objective and Scope

Standards for what costs are recognized as inventory costs and when these costs are transferred to the income statement as expense

IAS 2 excludes construction work-in-progress, inventories of financial instruments, and biological inventory assets related to agricultural activity and agricultural products at the point of harvest

7

IAS 2 - Objective and Scope

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

8

IAS 2 - Measurement

Inventories are measured at the lower of cost and net realizable value (LC and NRV)

Need to know:

- what costs are included

- what cost formulas are permitted

- how net realizable value is determined

9

IAS 2 - Measurement

Costs included:

1. Purchase costs

2. Conversion costs

3. Other inventoriable costs

10

IAS 2 - Measurement

Purchase costs

- purchase price and all costs directly attributable to their acquisition such as non-refundable taxes, transportation and handling, reduced by volume discounts and rebates

11

IAS 2 - Measurement

Conversion costs

- direct labor, indirect variable and fixed production overhead costs

- variable production overhead: allocate to inventory based on actual usage

- fixed production overhead: allocate to production based on normal operating capacity (except when abnormally high production)

12

IAS 2 - Measurement

Joint products

- Allocate between products on a rational basis such as relative sales value of products when they become separable

- If minor in value, do not allocate: measure by-product at net realizable value and deduct this amount from main product costs

13

IAS 2 - Measurement

Other inventoriable costs- limited to costs to bring the inventories to their present location and condition- example: amortization of capitalized development costs related to inventory- borrowing costs included if for a qualifying inventory item (if measured at FV or produced in large volumes on a repetitive basis, borrowing costs may, but are not required to be capitalized)

14

IAS 2 - Measurement

Do not add to inventory cost: Costs of abnormal waste Storage or warehousing costs unless

necessary for next stage of production Administrative overheads not associated with

production Selling costs Financing charges above purchase price for

normal credit terms

15

IAS 2 - Measurement

Cost formulas permitted should:- Assign recent costs to ending inventory- Correspond closely with the actual physical

flow of the goods and services

- Three permitted: Specific identification, First-in, first-out, and weighted average

16

IAS 2 - Measurement

Specific identification: For inventory items that are not ordinarily

interchangeable For goods and services produced and

segregated for specific projects

17

IAS 2 - Measurement

FIFO and weighted average: FIFO – cost of latest purchases ends up in

cost of ending inventory, cost of earliest purchases are in cost of goods sold

Weighted average – weighted average cost of all goods available for sale ends up in both ending inventory and cost of goods sold

18

IAS 2 - Measurement

KPMG : The Application of IFRS: Choices

in Practice – International Financial

Reporting Standards, December

2006

Results indicate that the usage of the FIFO and weighted average methods are fairly evenly split by companies reporting under IFRS

19

IAS 2 - Measurement

Inventories reported at the LC and NRV Why? So not reported at more than the future

cash flows into the company from their sale NRV = the estimated selling price in the

ordinary course of business less the estimated costs of completion and the estimated costs to make the sale

20

IAS 2 - Measurement

LC and NRV example: Cost $ 80 Selling price $ 84 Cost to complete $ 5 Cost to sell 10% of SP

NRV: $84 - $5 - $8.40 = $70.60

LC and NRV = $70.60

21

IAS 2 - Measurement

Write-downs are recognized in profit or loss Subsequent write-ups permitted to maximum

of prior write-downs if:

- changed economic circumstances and NRV has increased, prior situation no longer exists

Reversals also taken to profit or loss

22

IAS 2 – Expense Recognition

Carrying amount of inventory sold is expense in same period as the related revenue

Inventory adjustments (losses, write-downs to lower of cost and NRV, write-down reversals, etc.) are recognized as an adjustment to the expense recognized in the period

23

IAS 2 - Disclosure

Disclosures needed for: Accounting policies applied Inventory remaining on statement of financial

position Inventory costs recognized in profit or loss

24

IAS 2 - Disclosure

Balance sheet related disclosures: Carrying amount in each category of

inventory (materials, WIP, finished goods, production supplies, merchandise) and in total

Carrying amount of any inventory measured at fair value less costs to sell

Carrying amount of inventory pledged as collateral for liabilities

25

IAS 2 - Disclosure

Income statement related disclosures: Amount of inventory recognized as an

expense (usually cost of sales/cost of goods sold)

Amount of write-downs to NRV or other losses

Amount of any write-down reversals Circumstances that resulted in reversals

26

Current GAAP Comparisons

Pages 104, 122 & 146 of 164 ofhttp://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).pdf

27

IFRS Financial Statement DisclosuresSiemens AGhttp://w1.siemens.com/annual/07/pool/download/pdf_finanzinfo/e07_03_financial_statements.pdf

Statement of income page 01 of 118

Statement of fin’l positionpage 03 of 118

Accounting policy note page 20 of 118

Inventory note page 42 of 118

28

Looking Ahead

There is nothing on the IASB’s current agenda that directly involves potential changes to IAS 2 Inventories

29

End-of-Chapter Practice

7-1 The following costs have been incurred by a manufacturer of small leather goods:

1.Hides of various leather2.Dyes to color the leather3.Warehouse costs to store the dyed leather while drying4.Patterns and dies used to guide the cutting of the pieces into the desired shape5.The salary of the plant manager’s administrative assistant6.Costs of the warehouse to store finished goods7.Under-applied factory overhead

InstructionsDetermine whether the cost of each of the above items is included in the cost of inventory. Provide a brief explanation of

your answer for each.

30

End-of-Chapter Practice

31

End-of-Chapter Practice

32

End-of-Chapter Practice

33

End-of-Chapter Practice

Copyright © 2010 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted

by Access Copyright is unlawful. Requests for further information should be addressed to the Permissions

Department, John Wiley & Sons Inc., 111 River Street, Hoboken, NJ 07030-5774, (201) 748-6011, fax (201) 748-6008, website

http://www.wiley.com/go/permissions. The purchaser may make back-up copies for his or her own use only and not for

distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the

use of these programs or from the use of the information contained herein.