PAS 2 applies to all inventories
Inventories are assets:
except for the following:
a. Held for sale in the ordinary
Assets accounted for under
course of business (finished
other standards
goods);
a. Financial instruments (PAS 32
b. In the process of production
and PFRS 9); and
for such sale (work in
b. Biological assets and
PAS 2 prescribes the process); or
agricultural produce at the Examples of inventories:
accounting treatment for c. In the form of materials or
point of harvest (PAS 41) a. Merchandise purchased by a
inventories. PAS 2 recognizes supplies to be consumed in
that a primary issue in the the production process or in trading entity and held for
accounting for inventories is PAS 2 the rendering of services resale.
the determination of cost to be b. Land and other property
recognized as asset and carried
Inventories (raw materials and
manufacturing supplies). held for sale in the ordinary
forward until it is expensed. course of business.
c. Finished goods, goods
undergoing production, and
Measurement
raw materials and supplies
awaiting use in the
production process by a
manufacturing entity.
When an inventory item is initially
recognized, it is measured at cost. In
Disclosures
subsequent periods, inventory is
measured at the lower of cost and net
realizable value.
Cost Formulas
The cost formulas deal with the
computation of cost of inventories a. Accounting policies adopted
The cost of inventories comprises The following are excluded from the Net Realizable Value (NRV) in measuring inventories,
that are charged as expense when
the following: cost of inventories and are Net realizable value is “the including the cost formula
the related revenue is recognized as The carrying amount of an inventory
a. Purchase cost – this includes expensed in the period in which estimated selling price in the used;
well as the cost of unsold that is sold is charged as expense
the purchase price (net of they are incurred: ordinary course of business less the b. Total carrying amount of
inventories at the end of the period (i.e., cost of sales) in the period
trade discounts and rebates), a. Abnormal amounts of estimated costs of completion and inventories and the carrying
that are recognized as asset. PAS 2 which the related revenue is
import duties, non- wasted materials, labor or the estimated costs necessary to amount in classifications
provides the following cost recognized. Likewise, the write-
refundable or non- other production costs; make the sale.” appropriate to the entity;
formulas: downs of inventories to NRV and all
recoverable purchase taxes, b. Storage costs, unless those Measuring inventories at the lower c. Carrying amount of
1. Specific Identification – this losses of inventories are recognized
and transport, handling and cost are necessary in the of cost and NRV is in line with the inventories carried at fair
shall be used for inventories as expense in the period the write-
other costs directly production process before a basic accounting concept that an value less costs to sell;
that are not ordinarily down or loss occurs. “The amount of
attributable to the further production stage asset shall not be carried at an d. Amount of inventories
interchangeable and those any reversal of any write-down of
acquisition of inventory. (e.g., the storage costs of amount that exceeds its recoverable recognized as an expense
that are segregated for inventories, arising from an increase
b. Conversion cost – these partly finished goods may be amount. during the period;
specific projects. in net realizable value, shall be
refer to the costs necessary capitalized as cost of The cost of an inventory may exceed e. Amount of any write-down
2. First-In, First-Out (FIFO) – recognized as a reduction in the
in converting raw materials inventory, but the storage its recoverable amount if, for of inventories recognized as
under this formula, it is amount of inventories recognized as
into finished goods. costs of completed goods are example, the inventory is damaged, an expense in the period;
assumed that inventories an expense in the period in which
Conversion costs include the expensed); becomes obsolete, prices have f. Amount of any reversal of
that were purchased or the reversal occurs.”
costs of direct labor and c. Administrative overheads declined, or the estimated costs to write-down that is
produced first are sold first,
production overhead. that do not contribute to complete or to sell the inventory recognized as a reduction in
and therefore unsold
c. Other costs necessary in bringing inventories to their have increased. In these the amount of inventories
inventories at the end of the
bringing the inventories to present location and circumstances, the cost of the recognized as expense in the
period are those most
their present location and condition; and inventory is written-down to NRV. period;
recently purchased or
condition. d. Selling costs. The amount of write-down is g. Circumstances or events that
produced.
3. Weighted Average – under recognized as expense. led to the reversal of a write-
this formula, cost of sales down of inventories; and
and ending inventory are h. Carrying amount of
determined based on the inventories pledged as
weighted average cost of security for liabilities.
beginning inventory and all
inventories purchased or
produced during the period.
