NAS 2
NEPAL ACCOUNTING STANDARD 2
INVENTORIES
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NAS 2
CONTENTS
from paragraph
NEPAL ACCOUNTING STANDARD 2
INVENTORIES
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OBJECTIVE 1
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SCOPE 2
DEFINITIONS 6
MEASUREMENT OF INVENTORIES 9
Cost of inventories 10
Costs of purchase
Costs of conversion
Other costs
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15
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Cost of inventories of a service provider 19
Cost of agricultural produce harvested from biological assets 20
Techniques for the measurement of cost 21
Cost formulas 23
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Net realisable value 28
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RECOGNITION AS AN EXPENSE 34
DISCLOSURE 36
EFFECTIVE DATE 40
WITHDRAWAL OF OTHER PRONOUNCEMENTS 41
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NAS 2
Nepal Accounting Standard 2 Inventories (NAS 2) is set out in paragraphs 1–42. All the
paragraphs have equal authority. NAS 2 should be read in the context of its objective and the
Basis for Conclusions, the Preface to Nepal Financial Reporting Standards and the
Conceptual Framework for Financial Reporting. NAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors provides a basis for selecting and applying accounting
policies in the absence of explicit guidance.
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NAS 2
Nepal Accounting Standard 2
Inventories
Objective
1 T he objective of this Standard is to prescribe the accounting treatm ent for
inventories. A primary issue in accounting for inventories is the amount of cost to be
recognised as an asset and carried forward until the related revenues are recognised. This
Standard provides guidance on the determination of cost and its subsequent recognition as
an expense, including any write-down to net realisable value. It also provides guidance on
the cost formulas that are used to assign costs to inventories.
Scope
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2 This Standard applies to all inventories, except:
(a) work in progress arising under construction contracts, including directly related
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service contracts (see NAS 11 Construction Contracts);
(b) financial instruments (see NAS 32 Financial Instruments: Presentation and NFRS 9
Financial Instruments); and
(c) biological assets related to agricultural activity and agricultural produce at the point
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of harvest (see NAS 41 Agriculture).
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This Standard does not apply to the measurement of inventories held by:
(a) producers of agricultural and forest products, agricultural produce after harvest,
and minerals and mineral products, to the extent that they are measured at net
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realisable value in accordance with well-established practices in those industries.
When such inventories are measured at net realisable value, changes in that value
are recognised in profit or loss in the period of the change.
(b) commodity broker-traders who measure their inventories at fair value less costs to
sell. When such inventories are measured at fair value less costs to sell, changes
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in fair value less costs to sell are recognised in profit or loss in the period of the
change.
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4 The inventories referred to in paragraph 3(a) are measured at net realisable value at certain
stages of production. This occurs, for example, when agricultural crops have been harvested or
minerals have been extracted and sale is assured under a forward contract or a government
guarantee, or when an active market exists and there is a negligible risk of failure to sell. These
inventories are excluded from only the measurement requirements of this Standard.
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5 Broker-traders are those who buy or sell commodities for others or on their own account. The
inventories referred to in paragraph 3(b) are principally acquired with the purpose of selling in
the near future and generating a profit from fluctuations in price or broker-traders’ margin. When
these inventories are measured at fair value less costs to sell, they are excluded from only the
measurement requirements of this Standard.
Definitions
6 The follow ing terms are used in this Stand ard w ith the meanings specified:
Inventories are assets:
(a) held for sale in the ordinary course of business;
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NAS 2
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in
the rendering of services.
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.
Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. (See
NFRS 13 Fair Value Measurement.)
7 Net realisable value refers to the net amount that an entity expects to realise 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
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an entity-specific value; the latter is not. Net realisable value for inventories may not equal fair
value less costs to sell.
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8 Inventories encompass goods purchased and held for resale including, for example,
merchandise purchased by a retailer and held for resale, or land and other property held for
resale. Inventories also encompass finished goods produced, or work in progress being
produced, by the entity and include materials and supplies awaiting use in the production
process. In the case of a service provider, inventories include the costs of the service, as
described in paragraph 19, for which the entity has not yet recognised the related revenue (see
NAS 18 Revenue).
Measurement of inventories
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9 Inventories shall be measured at the lower of cost and net realisable value.
Cost of inventories
10 The cost of inventories shall comprise all costs of purchase, costs of conversion and
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other costs incurred in bringing the inventories to their present location and condition.
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Costs of purchase
11 The costs of purchase of inventories comprise the purchase price, import duties and other taxes
(other than those subsequently recoverable by the entity from the taxing authorities), and
transport, handling and other costs directly attributable to the acquisition of finished goods,
materials and services. Trade discounts, rebates and other similar items are deducted in
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determining the costs of purchase.
Costs of conversion
12 The costs of conversion of inventories include costs directly related to the units of production,
such as direct labour. They also include a systematic allocation of fixed and variable production
overheads that are incurred in converting materials into finished goods. Fixed production
overheads are those indirect costs of production that remain relatively constant regardless of
the volume of production, such as depreciation and maintenance of factory buildings and
equipment, and the cost of factory management and administration. Variable production
overheads are those indirect costs of production that vary directly, or nearly directly, with the
volume of production, such as indirect materials and indirect labour.
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NAS 2
13 The allocation of fixed production overheads to the costs of conversion is based on the normal
capacity of the production facilities. Normal capacity is the production expected to be achieved
on average over a number of periods or seasons under normal circumstances, taking into
account the loss of capacity resulting from planned maintenance. The actual level of production
may be used if it approximates normal capacity. The amount of fixed overhead allocated to
each unit of production is not increased as a consequence of low production or idle plant.
Unallocated overheads are recognised as an expense in the period in which they are incurred.
In periods of abnormally high production, the amount of fixed overhead allocated to each unit of
production is decreased so that inventories are not measured above cost. Variable production
overheads are allocated to each unit of production on the basis of the actual use of the
production facilities.
14 A production process may result in more than one product being produced simultaneously. This
is the case, for example, when joint products are produced or when there is a main product and
a by-product. When the costs of conversion of each product are not separately identifiable, they
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are allocated between the products on a rational and consistent basis. The allocation may be
based, for example, on the relative sales value of each product either at the stage in the
production process when the products become separately identifiable, or at the completion of
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production. Most by-products, by their nature, are immaterial. When this is the case, they are
often measured at net realisable value and this value is deducted from the cost of the main
product. As a result, the carrying amount of the main product is not materially different from its
cost.
Other costs
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15 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. For example, it may be
appropriate to include non-production overheads or the costs of designing products for specific
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customers in the cost of inventories.
16 Examples of costs excluded from the cost of inventories and recognised as expenses in the
period in which they are incurred are:
(a) abnormal amounts of wasted materials, labour or other production costs;
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(b) storage costs, unless those costs are necessary in the production process before a
further production stage;
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(c) administrative overheads that do not contribute to bringing inventories to their
present location and condition; and
(d) selling costs.
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17 NAS 23 Borrowing Costs identifies limited circumstances where borrowing costs are included in
the cost of inventories.
18 An entity may purchase inventories on deferred settlement terms. When the arrangement
effectively contains a financing element, that element, for example a difference between the
purchase price for normal credit terms and the amount paid, is recognised as interest expense
over the period of the financing.
Cost of inventories of a service provider
19 To the extent that service providers have inventories, they measure them at the costs of their
production. These costs consist primarily of the labour and other costs of personnel directly
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NAS 2
engaged in providing the service, including supervisory personnel, and attributable overheads.
Labour and other costs relating to sales and general administrative personnel are not included
but are recognised as expenses in the period in which they are incurred. The cost of inventories
of a service provider does not include profit margins or non-attributable overheads that are often
factored into prices charged by service providers.
Cost of agricultural produce harvested from biological assets
20 In accordance with NAS 41 Agriculture inventories comprising agricultural produce that an entity
has harvested from its biological assets are measured on initial recognition at their fair value
less costs to sell at the point of harvest. This is the cost of the inventories at that date for
application of this Standard.
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Techniques for the measurement of cost
21 Techniques for the measurement of the cost of inventories, such as the standard cost method
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or the retail method, may be used for convenience if the results approximate cost. Standard
costs take into account normal levels of materials and supplies, labour, efficiency and capacity
utilisation. They are regularly reviewed and, if necessary, revised in the light of current
conditions.
22 The retail method is often used in the retail industry for measuring inventories of large numbers
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of rapidly changing items with similar margins for which it is impracticable to use other costing
methods. The cost of the inventory is determined by reducing the sales value of the inventory by
the appropriate percentage gross margin. The percentage used takes into consideration
inventory that has been marked down to below its original selling price. An average percentage
for each retail department is often used.
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Cost formulas
23 The cost of inventories of items that are not ordinarily interchangeable and goods or
services produced and segregated for specific projects shall be assigned by using
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specific identification of their individual costs.
24 Specific identification of cost means that specific costs are attributed to identified items of
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inventory. This is the appropriate treatment for items that are segregated for a specific project,
regardless of whether they have been bought or produced. However, specific identification of
costs is inappropriate when there are large numbers of items of inventory that are ordinarily
interchangeable. In such circumstances, the method of selecting those items that remain in
inventories could be used to obtain predetermined effects on profit or loss.
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25 The cost of inventories, other than those dealt with in paragraph 23, shall be assigned by
using the first-in, first-out (FIFO) or weighted average cost formula. An entity shall use
the same cost formula for all inventories having a similar nature and use to the entity.
For inventories with a different nature or use, different cost formulas may be justified.
26 For example, inventories used in one operating segment may have a use to the entity different
from the same type of inventories used in another operating segment. 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.
27 The FIFO formula assumes that the items of inventory that were purchased or produced first are
sold first, and consequently the items remaining in inventory at the end of the period are those
most recently purchased or produced. Under the weighted average cost formula, the cost of
each item is determined from the weighted average of the cost of similar items at the beginning
of a period and the cost of similar items purchased or produced during the period. The average
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NAS 2
may be calculated on a periodic basis, or as each additional shipment is received, depending
upon the circumstances of the entity.
Net realisable value
28 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. 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 realised from their sale or use.
29 Inventories are usually written down to net realisable value item by item. In some
circumstances, however, it may be appropriate to group similar or related items. This may be
the case with items of inventory relating to the same product line that have similar purposes or
end uses, are produced and marketed in the same geographical area, and cannot be
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practicably evaluated separately from other items in that product line. 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. Service providers generally accumulate
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costs in respect of each service for which a separate selling price is charged. Therefore, each
such service is treated as a separate item.
30 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
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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
31 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
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satisfy firm sales or service contracts is based on the contract price. If the sales contracts are
for less than the inventory quantities held, the net realisable value of the excess is based on
general selling prices. Provisions may arise from firm sales contracts in excess of inventory
quantities held or from firm purchase contracts. Such provisions are dealt with under NAS 37
Provisions, Contingent Liabilities and Contingent Assets.
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32 Materials and other supplies held for use in the production of inventories are not written down
below cost if the finished products in which they will be incorporated are expected to be sold at
or above cost. However, when a decline in the price of materials indicates that the cost of the
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finished products exceeds net realisable value, the materials are written down to net realisable
value. In such circumstances, the replacement cost of the materials may be the best available
measure of their net realisable value.
33 A new assessment is made of net realisable value in each subsequent period. When the
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circumstances that previously caused inventories to be written down below cost no longer exist
or when there is clear evidence of an increase in net realisable value because of changed
economic circumstances, the amount of the write-down is reversed (ie the reversal is limited to
the amount of the original write-down) so that the new carrying amount is the lower of the cost
and the revised net realisable value. This occurs, for example, when an item of inventory that is
carried at net realisable value, because its selling price has declined, is still on hand in a
subsequent period and its selling price has increased.
Recognition as an expense
34 When inventories are sold, the carrying amount of those inventories shall be recognised
as an expense in the period in which the related revenue is recognised. The amount of
any write-down of inventories to net realisable value and all losses of inventories shall be
recognised as an expense in the period the write-down or loss occurs. The amount of
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NAS 2
any reversal of any write-down of inventories, arising from an increase in net realisable
value, shall be recognised as a reduction in the amount of inventories recognised as an
expense in the period in which the reversal occurs.
35 Some inventories may be allocated to other asset accounts, for example, inventory used as a
component of self-constructed property, plant or equipment. Inventories allocated to another
asset in this way are recognised as an expense during the useful life of that asset.
Disclosure
36 The financial statements shall disclose:
(a) the accounting policies adopted in measuring inventories, including the cost
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formula used;
(b) the total carrying amount of inventories and the carrying amount in classifications
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appropriate to the entity;
(c) the carrying amount of inventories carried at fair value less costs to sell;
(d) the amount of inventories recognised as an expense during the period;
(e) the amount of any write-down of inventories recognised as an expense in the
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period in accordance with paragraph 34;
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the amount of any reversal of any write-down that is recognised as a reduction in
the amount of inventories recognised as expense in the period in accordance with
paragraph 34;
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(g) the circumstances or events that led to the reversal of a write-down of inventories
in accordance with paragraph 34; and
(h) the carrying amount of inventories pledged as security for liabilities.
37 Information about the carrying amounts held in different classifications of inventories and the
extent of the changes in these assets is useful to financial statement users. Common
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classifications of inventories are merchandise, production supplies, materials, work in progress
and finished goods. The inventories of a service provider may be described as work in progress.
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38 The amount of inventories recognised as an expense during the period, which is often referred
to as cost of sales, consists of those costs previously included in the measurement of inventory
that has now been sold and unallocated production overheads and abnormal amounts of
production costs of inventories. The circumstances of the entity may also warrant the inclusion
of other amounts, such as distribution costs.
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39 Some entities adopt a format for profit or loss that results in amounts being disclosed other than
the cost of inventories recognised as an expense during the period. Under this format, an entity
presents an analysis of expenses using a classification based on the nature of expenses. In this
case, the entity discloses the costs recognised as an expense for raw materials and
consumables, labour costs and other costs together with the amount of the net change in
inventories for the period.
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NAS 2
Effective date
40 An entity shall apply this Standard for annual periods beginning on or after XXXXXX
40A [Deleted]
40B [Deleted]
40C [Deleted]
Withdrawal of other pronouncements
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41 This Standard supersedes earlier NAS 04 Inventories (revised in 2008).
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42 [Deleted]
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