Overview. This Accounting Standard is aimed to streamline the accounting methods for inventories.

Transcription

1 IAS 2 INVENTORIES

2 Overview This Accounting Standard is aimed to streamline the accounting methods for inventories. The foremost concern in Inventory accounting is that the cost would be considered as asset which gets carried further until the other relevant revenues are recorded.

3 Overview This provides guidance for determining the cost and its consecutive records as expense. It includes all written down to the net value which is realizable. Added to this it provides guidelines on cost formulas employed to assign costs for inventories.

4 Objectives The objective of IAS 2 is to set out the accounting treatment for inventories. It provides guidance on determining cost and its subsequent recognition as an expense including any write down to net realizable value. [IAS 2 para 1].

5 Objectives A primary issue in accounting for inventories is the amount of cost to be recognized as an asset and carried forward until the related revenues are recognised

6 Objectives It also provides guidance on the cost formulas that are used to assign costs to inventories. Inventories shall be measured at the lower of cost and net realizable value

7 Scope Applicable to all the inventories, except work in progress on construction contracts and service contracts. financial instruments (IAS 32 & IFRS 9). biological assets arising from agricultural activity at the point of harvest (IAS 41).

8 Scope The Standard is also not applicable to the producers of agricultural and forest products after harvest, mineral and mineral products and commodity broker-traders who measure their inventories at fair value less costs to sell

9 Scope The improvements to IFRSs amended IAS 41, Agriculture, which resulted in an amendment to IAS 2. Agriculture inventories comprising agricultural produce that an entity has harvested from its biological assets are now measured on initial recognition at their fair value less costs to sell at the point of harvest.

10 Definitions Inventories are assets: held for sale in the ordinary course of business; in the process of production for sale, or in the form of materials or supplies to be consumed in production or in rendering services. [IAS 2 para 6].

11 Definitions

12 Definitions Net Realizable 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.

13 Definitions Fair Value: is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction.

14 Recognition An entity should initially recognise inventory when it has control of the inventory, expects it to provide future economic benefits and the cost of the inventory can be measured reliably. [Framework paras 49(a), 89].

15 Recognition Assets held in an entity s premises may not qualify as inventories if they are held on consignment (that is, on behalf of another entity and where no liability to pay for the goods exists unless they are sold).

16 Measurement Initial measurement of inventories is at cost. The cost of inventories includes all costs of purchase, costs of conversion and all other costs incurred in bringing the inventories to their present location and condition.

17 Measurement The costs of purchase include the purchase price, import duties and other taxes (not recoverable from the taxing authorities), transport and handling costs and other costs directly attributable to the acquisition of the inventory. Reductions are made for trade discounts, rebates

18 Measurement Agricultural produce, such as wool, logs and grapes is the harvested product of biological assets and is recognised as inventory. [IAS 2 para 20]. The cost of agricultural produce at initial recognition is its fair value less costs to sell at the point of harvest. [IAS 41 para 13].

19 Measurement Costs of acquisition, manufacture, exchange and other expenses are included in the inventories that have made it be in the current position. Purchase costs include; purchase price, Transport costs, import duties,

20 Measurement handling taxes and other expenses that have direct impact on the procurement of products.

21 Measurement Costs not included in the valuation of inventories but treated as expenses when they occur include; Abnormal wastage of materials, labor and other production costs Storage costs not essential for the production process Selling and distribution costs

22 Measurement

23 Measurement

24 Measurement Example 1 Tuntufye Trading Company purchases motorbikes from several countries and sells them to Northern regions. During the current year, the company has incurred following expenses: 1. Trade discounts on purchase 2. Handling costs relating to imports. Cont.

25 Measurement 3. Salaries of accounting department 4. Sales commission paid to sales agents 5. Import duties 6. After sales warrant costs 7. Costs of purchases (supplier s invoices) 8. Freight expense cont.

26 Measurement 9. Insurance of purchases 10. Brokerage commission paid to indenting agents Tuntufye Trading Company seeks your advice on which costs are allowed by IAS 2 for inclusion in the cost of inventory. Advice

27 Measurement Solution: Items 1, 2, 5, 7, 8, 9, 10 are allowed by IAS 2 for the calculation of cost of inventories. Salaries of accounts department, sales commission, and after sales warranty costs are not considered to be the cost of inventory therefore they are not allowed

28 Measurement Subsequent to initial recognition, entities should measure inventories at the lower of cost or net realisable value (defined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated selling costs). [IAS 2 paras 9, 6].

29 Measurement Cost should be determined based on specific identification for goods not ordinarily interchangeable or those segregated for specific projects. Specific identification costing is not appropriate for inventories of homogeneous products, such as raw materials to be used in production. FIFO or weighted average

30 Measurement Example 2 Hapa kazi Plc manufactures mechanical parts, which trade under the name Faru. In the year ended 31 December 2015, 10,000 Faru were manufactured and the related costs were: Materials 3,000,000 Labour

31 Measurement Sundry factory expenses 2,000,000 Production storage costs 1,000,000 Selling expenses 2,000,000 Expenses at head office 4,000,000 At 31 December 2015, there were 1,000

32 Measurement Solution Materials 3,000,000 Labour 4,000,000 Depreciation of machinery 2,000,000 Factory rates 1,000,000 Sundry factory expenses

33 Measurement Production storage costs 1,000,000 Total cost 13,000,000 Units manufactured 10,000 Unit cost 1,300 Number of units at year end 1,000

34 Measurement IAS 2 does not permit exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency to be included in the costs of purchase of inventories.

35 Measurement IAS 2 does not permit exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency to be included in the costs of purchase of inventories.

36 Measurement Net realizable value The estimated selling price in the ordinary course of business less the estimated costs of completion and less the estimated costs necessary to make the sale

37 Provision for inventory impairment The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined.

38 The cost of inventories may also not be recoverable if the estimated costs of completion or the estimated costs to be incurred to make the sale have increased. The practice of writing inventories down below cost to net realisable value is consistent with the view that assets should not be carried in excess of amounts expected to be realized from their sale or use.

39 Derecognition Inventory is derecognised when it is sold. It is recognised as an expense in the same period as the revenue from its sale is recognised. An entity should also derecognise inventory when it has no future economic value, for example, obsolete inventory. The point at which to derecognise inventory is not always straightforward,example where an entity supplies goods under sale and repurchase agreements, the entity may retain the risks and

40 Derecognition

41 Disclosure Accounting policy adopted in measuring inventories, including cost formulas Carrying amount of inventories under major headings (e.g. raw materials, WIP and finished goods) Carrying amount of inventories at fair value less costs to sell Amount expended in the period Amount of any write downs of inventories Amount of any reversal of write downs Cause of write downs Carrying amount of inventories pledged as

42 End THANK YOU FOR YOUR ATTENTION