12.1 IAS 2 Inventories and IAS 10 Events after the reporting period

Question 1

IAS 2 Inventories - are assets that are:

Answer 1

• held for sale in the ordinary course of business
• in the process of production
• materials that will be used in the production process

Question 2

Measurement of inventories:

Answer 2

Value at lower of:
- Cost - Cost of purchase, costs of conversion and costs to bring inventory to present location and condition (may include overheads, these should be allocated based on normal production levels)
- Net realisable value - Estimated selling prices less costs to completion less costs to sell

Question 3

Calculation of costs - If inventory should be valued at cost (when cost is lower than realisable value)

Answer 3

• either the actual cost of an item (unit cost) or a reasonable approximation to actual cost should be used
• a reasonable approximation would be used if the determination of an items actual cost is impractical (eg. there are a large number of items or it is impossible to identify actual costs)

Question 4

Calculation of costs - The most common approximations are:

Answer 4

• First in first out (FIFO) - the closing inventory is assumed to consist of the latest purchases (ie. oldest inventory sold first). Therefore closing inventory will be valued at most recent purchase prices (suitable for food)
• Average cost (AVCO) - the weighted average cost is calculated by taking the total purchase price of all units purchased in the period divided by the total number of units purchased in the period (calculated using a periodic or continuous method) (eg: oil)

Question 5

Disclosure - The main disclosure requirements of IAS 2 are:

Answer 5

• Accounting policy adopted, including the cost formula used
• Total carrying amount, classified as follows: Raw materials + Work in progress + Finished goods (in a note to FS
• Amount of inventories carried at NRV
• Amount of inventories recognised as an expense during the period
• Details of circumstances that have led to the write down of inventories to their NRV

Question 6

Examples of adjusting events that gave evidence of conditions that existed at reporting date

Answer 6

• Selling inventory post year end for lower than cost (inventory incorrectly valued)
• Evidence that a customer has gone into liquidation
• Discovery of fraud or error that existed prior to year end
• Completion of court case entered into before reporting date
• Completion of an insurance claim relating to an event that occurred prior to year end
• Determination after year end, of the sale or purchase price of assets sold or purchased before year end

Question 7

Examples of non- adjusting events that show evidence of having arisen since the reporting date

Answer 7

• Acquisition or disposal of a subsidiary after year end
• Announcements of a plan to discontinue an operation
• Destruction of an asset by fire or flood after reporting date
• Announcements of a plan to restructure
• Share capital transactions after the reporting date
• Changes in taxation or exchange rate after reporting date
• Strikes or other labour disputes
• Equity dividends declared after the reporting period but before authorised for issue

Question 8

IAS 10 Events after the reporting period definition

Answer 8

those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the FS are authorised for issue

Question 9

IAS 10 identifies two types of events after the reporting period:

Answer 9

• Adjusting events - events which provide evidence of conditions that existed at the reporting date (FS should be adjusted to reflect the adjusting event)
• Non - adjusting events - those that are indicative of conditions that arose after the reporting date (FS should not be adjusted, but should be disclosed if they affect users understanding of FS)

Question 10

IAS 10 - Going concern

Answer 10

• If an event after the reporting date indicates that the entity is no longer a going concern, the FS for the current period should not be prepared on the going concern basis
• Instead would be prepared using the break up analysis where all assets are valued at the lower of cost and net realisable value and all liabilities are reclassified as current

Question 11

IAS 10 - Disclosure - A non adjusting event after the reporting date should be disclosed (by note) where the event has a material effect on the FS. The note should disclose:

Answer 11

• The nature of the event
• An estimate of the financial effect, or a statement that it is not practicable to make such an estimate (the estimate should be made before taxation, with an explanation of taxation implications where necessary for proper understanding of FP)
• The date directors approved FS (date on which FS are authorised for issue)