Lesson 14 International Accounting Lelio Bigogno, Stefano Santucci
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1 Università degli studi di Pavia Facoltà di Economia a.a Lesson 14 International Accounting Lelio Bigogno, Stefano Santucci 1
2 IAS 2 Inventories International Accounting Lesson 11 2
3 History of IAS 2 September 1974 Exposure Draft E2 Valuation and Presentation of Inventories in the Context of the Historical Cost System October 1975 IAS 2, Valuation and Presentation of Inventories in the Context of the Historical Cost System August 1991 Exposure Draft E38 Inventories December 1993 IAS 2 (1993) Inventories 'Comparability of Financial Statements' project) 1 January 1995 Effective date of IAS 2 (1993) (revised as part of the 18 December 2003 Revised version of IAS 2 issued by the IASB 1 January 2005 Effective date of IAS 2 (Revised 2003) Related Interpretations IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine SIC 1 Consistency - Different Cost Formulas for Inventories. SIC 1 was superseded by and incorporated into IAS 2 (Revised 2003). International Accounting Lesson 11 3
4 Objectiveof IAS 2 TO prescribe the ACCOUNTING TREATMENT for inventories it provides HOW? guidance for determining the COST of inventories and for subsequently RECOGNISING an expense, including any write-down to net realisable value. guidance on the COST FORMULAS that are used to assign costs to inventories. International Accounting Lesson 11 4
5 Scope of IAS 2 Inventories include: FINISHED GOODS: assets held for sale in the ordinary course of business; WORK IN PROCESS: assets in the production process for sale in the ordinary course of business; RAW MATERIALS: materials and supplies that are consumed in production International Accounting Lesson 11 5
6 Scope of IAS 2 Inventories excluded from IAS2 s scope: work in process arising under construction contracts (see IAS 11 Construction Contracts) financial instruments (see IAS 39 Financial Instruments: Recognition and Measurement) biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41 Agriculture). International Accounting Lesson 11 6
7 Scope of IAS 2 IAS 2 does not apply to the measurement of inventories held by: producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products (net realisable value); commodity brokers and dealers (fair value less costs to sell) International Accounting Lesson 11 7
8 Fundamentalprincipleof IAS 2 Inventories are required to be stated at the lower of cost and net realisable value (NRV). International Accounting Lesson 11 8
9 Measurementof inventories Cost should include all: costs of purchase (including taxes, transport, and handling) net of trade discounts received costs of conversion (including fixed and variable manufacturing overheads) and other costs incurred in bringing the inventories to their present location and condition International Accounting Lesson 11 9
10 Measurementof inventories Borrowing costs (interests) can be included in cost of inventories only in limited circumstances. International Accounting Lesson 11 10
11 Measurementof inventories Inventory cost should not include: abnormal waste storage costs administrative overheads unrelated to production selling costs foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency interest cost when inventories are purchased with deferred settlement terms International Accounting Lesson 11 11
12 Measurementof inventories The standard cost and retail methods may be used for the measurement of cost, provided that the results approximate actual cost International Accounting Lesson 11 12
13 Measurementof inventories Non interchangeable items: specific costs are attributed to the specific individual items of inventory; Interchangeable items: FIFO or weighted average cost formulas are allowed. LIFO formula is not allowed. International Accounting Lesson 11 13
14 Measurementof inventories 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 International Accounting Lesson 11 14
15 Write-downtonet realisable value NRV (net realisable value) is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale. NRV=(estimated selling price)-(estimated cost of completion)-(estimated selling costs). International Accounting Lesson 11 15
16 Write-downtonet realisable value Any write-down to NRV should be recognised as an expense in the period in which the write-down occurs. International Accounting Lesson 11 16
17 Write-downtonet realisable value Any reversal should be recognised in the income statement in the period in which the reversal occurs. International Accounting Lesson 11 17
18 Expenserecognition 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. International Accounting Lesson 11 18
19 Required Disclosure accounting policy for inventories; carrying amount, generally classified as merchandise, supplies, materials, work in progress, and finished goods; carrying amount of any inventories carried atfairvalue lesscoststosell; amount of any write-down of inventories recognised as an expense in the period International Accounting Lesson 11 19
20 Required Disclosure amount of anyreversal of a writedown 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). International Accounting Lesson 11 20
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