IND AS 2 - Inventories Flashcards
What are the scope exclusions from the standard on IND AS 2 - Inventories
What is the definition of Inventory as per IND AS 2 and what does it encompass of?
Inventories encompass of:
a) goods purchased and held for resale (e.g. merchandise purchased by a retailer and held for resale, or land and other property held for resale);
b) finished goods produced, or work in progress being produced, by the entity; and includes
c) materials and supplies awaiting use in the production process.
Costs incurred to fulfill a contract with a customer that do not give rise to inventories are accounted as per Ind AS 115.
What is the definition of Net realisable value as per the Provisions of IND AS 2 and how is it different from Fair value - Cost to sell and the reason why both of these are not necessarily be the same?
- Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
- Net realisable value refers to the net amount that an entity expects to realize from the sale of inventory in the ordinary course of business.
- Fair value reflects the price at which an orderly transaction to sell the same inventory in the principal (or most advantageous) market for that inventory would take place between market participants at the measurement date.
- The former is an entity-specific value; the latter is not. Net realisable value for inventories may not equal fair value less costs to sell
What is the measurement requirement for cost of Inventories as per IND AS 2?
What are the Components that go into the cost of purchase of Inventories as per IND AS 2?
What are the components of cost of Conversion as per the provisions of IND AS 2?
What is the treatment of Fixed production overheads in comparison with the variable Production overheads? when Normal capacity should be used in place of Actual capacity to record accurate cost per unit of Inventory?
General Rule - Normal capacity in case of Fixed OH when the Actual production is less than normal Production
Actual Capacity when Actual Production is greater than Normal Production
In case of Variable OH - It will always be based on actual production made
What is the treatment of Other cost? when it is to be included and excluded from the cost of the inventory as per IND AS 2?
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.
What is the treatment of Joint and By Products and how the accounting for the same has to be performed as per this standard?
What are the cost formulas that has to be applied for valuation of Inventory on the closing date?
- An entity shall use the same cost formula for all inventories having a similar nature and use to the entity.
- However, a difference in geographical location of inventories (or in the respective tax rules), by itself, is not sufficient to justify the use of different cost formulas.
What is the formula for computing Weighted average cost of Inventory ?
- involves the computation of an average unit cost by dividing the total cost of units by the number of units
- The average unit cost then has to be revised with every receipt of inventory, or alternatively at the end of predetermined periods
What is the meaning of the term NRV and what are the costs that can be included in the estimated cost to complete or cost to sell as per IND AS 2?
Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
Cost to complete the WIP as at the end of the period is considered in the estimated cost to complete on the balance sheet date.
Also Trade discount, since it is as per prevalent commercial practices, will be allowed to be reduced from the estimated cost to sell. But cash discount will not be allowed to be reduced from estimated cost to sell due to the fact it is given to encourage immediate payment by the customer.
What types of Fluctuations in the value of inventory after the balance sheet date is permitted to be adjusted against the value of inventory as at the balance sheet date as per IND AS 2?
Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made, of the amount the inventories are expected to realise. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period.
Exception: However, if this product is, for example, an exchange traded commodity, and the loss realised can be attributed to a fall in prices on the exchange after the period end date, then this loss would not, in itself, provide evidence of the net realisable value at the period end date.
What will be value of NRV when there is a firm sales contract wherein a sale price different than the NRV is agreed with? how will this affect the valuation as on the balance sheet date as per IND AS 2?
Estimates of net realisable value also take into consideration the purpose for which the inventory is held. For example, the net realisable value of the quantity of inventory held to satisfy firm sales or service contracts is based on the contract price.
the sales contracts are for less than the inventory quantities held, the net realisable value of the excess quantity is based on general selling prices.
If there is a firm contract to sell quantities in excess of inventory quantities that the entity holds or is able to obtain under a firm purchase contract, this may give rise to an onerous contract liability that should be provided for in accordance with Ind AS 37 “Provisions, Contingent Liabilities and Contingent Assets”.
How the inventory write down to NRV, if any has to be done? has it to be done on an item by item basis or category based?
Inventories are usually written down to net realisable value item by item. It is not appropriate to write inventories down on the basis of a classification of inventory, for example, finished goods, or all the inventories in a particular operating segment.
The cost and net realisable value should be compared for each separately identifiable item of inventory, or group of similar inventories, rather than for inventory in total.
