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IAS2 Inventories
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IAS 2 Inventories Cost of inventories
Accruals – key concept
• Purchase e.g. purchase price, import
Inventory – an asset, which is:
costs/taxes, transport and handling costs less
• Held for sale in the ordinary course of
trade discounts etc
business
• In the process of production for such sale • Cost of conversion e.g. direct materials, direct
labour, variable production costs
• In the form of materials or supplies to be
consumed in the production process or in the • Other costs – present location and condition
rendering of services but not including selling, admin or storage
These are goods purchased for resale, finished costs
goods, WIP and raw materials
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Costs not included in inventory Rules
• Abnormal amounts of wasted materials, • Can use FIFO and AVCO (not LIFO)
labour or other production costs • But, must be consistent for all inventories
• Storage costs (after production or not having a similar nature and use to the entity
necessary for the production process) • Valued at lower of cost or NRV
• Administration costs that do not contribute to
bringing inventories to their present location
and condition
• Selling and distribution costs
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Inventories are measured Lower of cost and NRV – item by item
• At the lower of cost and net realisable value Inventory item Cost NRV Lower
• Cost $ $ $
– Cost of purchase, conversion and to bring
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inventory to present location and condition
– Costs of conversion may include production 2 14 8 8
overheads which should be allocated based on 3 43 55 43
normal production levels 4 29 40 29
• Net realisable value 113 135 107
– Estimated selling prices less costs to completion
less costs to sell The inventories figure is $107 not $113
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Disclosure Disclosure
• The main disclosure requirements of IAS 2 are • This would be disclosed in a note to the
– Accounting policy adopted, including the cost financial statements
formula used • The total amount of inventory will be shown
– Total carrying amount classified as follows; as a current asset and a reduction to the cost
• Raw materials X of sales
• Work in progress X
• Finished goods X
• Details of circumstances that have led to the
X write down on inventories to NRV
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