KAP 5 - Inventories Flashcards
How are Inventories Initially Measured?
Initial measurement
Inventories are initially measured at “COST” The cost Includes:
-
Purchase costs
- Import duties
- Irrecoverable taxes
- Inbound Transport
- Handling costs
- Any other directly attributable costs
- Less Discounts & Rebates
-
Conversion costs include all direct costs of conversion
- (materials, labour, expenses, etc.),
- Proportion of Fixed production overheads
-
Proportion of Variable production overheads
- Allocation must be based on the normal level of activity.
- Note on excluded costs - Abnormal wastage, storage costs, administration costs and selling costs, must be excluded from the valuation and charged as expenses in the period in which they are incurred.
IAS 2 allows three methods of arriving at the cost of inventories:
- Actual unit cost
- First-in, First-out (FIFO)
- Weighted Average Cost (AVCO).
Actual unit cost must be used where items of inventory are not ordinarily interchangeable.
How are Inventories Subsequently Measured?
Subsequent measurement
- Inventories may be sold below cost if they are damaged, declined in demand, or if the market is increasingly competitive.
- Also, items or work in progress is overstated if there has been a rise in the costs required to complete the asset and make the sale.
- “Work in progress” - items in production but not yet completed is accounted for by separating all purchase costs of raw materials, production costs directly attributable)
As such, IAS 2 requires inventories to be written down to the lower:
- COST
- Net Realisable Value (NRV) on a line-by-line basis.
NET REALISABLE VALUE is measured by:
-
Estimated proceeds from selling
Less: completion costs
Less: selling costs
= (NRV)
How is NRV calculated?
Hint
evidence base or estimated?
Notes on evidence of NRV
- NRV of inventory held to satisfy a sales contract is normally evidenced by that contract.
- Sales of inventory after the reporting date provide strong evidence about its NRV as at the reporting date.
However, in other cases, NRV must be *estimated.*
- When measuring NRV, similar items to be grouped together, assuming they are sold in the same market.
- **Raw materials are not written down below cost if the finished good they will form will be sold at a profit.
- However, a decline in raw material prices would suggest that their NRV has fallen below purchase cost.**
- *- In such cases, the replacement cost of the raw materials provides evidence of their NRV.**
What are the disclosure requirements of IAS 2:
IAS 2:Inventories
Disclosure requirements
Entities should disclose:
- The total carrying amount of inventories by category
- Details of inventories carried at net realisable value