International Accounting

Standard 2..
Inventories/ Stock evaluation

 Presented by: Dr.Zainab Fatima

 Presented to: Mr.Munawwar Hameed
 CONTENTS:
 History of IAS 2
 Summary of IAS 2
• Objective
• Scope
• Principle
• Measurement of Inventories
• Expense recognition
• Disclosure
 A view of IAS:
 IAS stands for International Accounting Standard
 These are financial statements that serve as a guide to
resolve accounting issues
 These IAS are formed by a board of 15 members called
as IASB i.e. International Accounting Standard board
 IASB ha set up 41 standards so far.
 some of them are:
 IAS 1:Presentation of financial statements
 IAS 2: Inventories
 IAS 7: Cash flow
 HISTORY:
September Exposure Draft E2 Valuation and Presentation of
1974 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 IAS 2 (1993) Inventories (revised as part of the
1993 'Comparability of Financial Statements' project)
1 January Effective date of IAS 2 (1993)
1995
18 Dec 2003 Revised version of IAS 2 issued by the IASB
1 January Effective date of IAS 2 (Revised 2003)
2005
 SUMMARY:
 Objective:
o To prescribe the accounting treatment for
inventories is the objective of IAS 2.
o It is a standard for which costs should be recognized
as inventory costs and when these costs are
transferred to the income statement as expense.
o It also provides guidance to any write down to net
realisable value.
o Guidelines on the cost formulas used to assign cost of
inventories is also provided by this IAS.
 Some basic terminologies:
 INVENTORIES:
Inventory is a list for goods and materials. In accounting
inventory is an asset.
 STOCK:
Stock valuation is the method of calculating theoretical
values of companies and their stocks i.e stored items
 COST:
cost is the value of money that has been used up to
produce something

NRV (Net Relisable Value):

 NRV is the selling price of any object at a cost lower
than the actual cost.
 NRV is determined of those inventories which have been
damaged or become wholly or partially obselete or if
their selling prices have declined
 SCOPE:
 Inventories included by IAS 2 are:
 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 and
 raw materials: materials and supplies that are
consumed in production
 CONTD..

 Inventories excluded by IAS2:

 work in process arising under construction contracts (IAS
11)
 financial instruments (IAS 39)
 biological assets related to agricultural activity and
agricultural produced at the point of harvest (IAS 41)
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 Inventories Measurement :

 In order to measure inventories we should know:

- Costs included
- Cost formulas permitted
- Determination of net realizable value
 COST INCLUDES:

1. Purchase costs
2. Conversion costs
3. Other costs
 PURCHASE COST:
 Comprises of:
- Purchase price
- Import duties
- Transport
- Handling
- Trade discounts
- rebates
 CONVERSION COSTS:
- Direct labour, indirect variable and fixed
production overhead costs
- Variable production overhead: allocate to
inventory based on actual usage
- Fixed production overhead: allocate to
production based on normal operating capacity
(except when abnormally high production)
 JOINT PRODUCTS:
 A production process may result in the formation of one
product and a by-product called as joint product.
 Cost of production of each product no separately
identifiable: allocate between rational and consistent
basis
 By products if immaterable usually measured at NRV and
this NRV is deducted from main product costs
 OTHER COSTS:
 Other costs include those costs that are used in bringing
inventories to their location and condition
 Example: non production overheads or cost of designing
products for specific customers in the cost for
inventories
 Borrowing cost: in some specific conditions borrowing
costs (interest) can be included in inventory costs.
 NOT INCLUDED:
IN INVENTORY COSTS:
 Labour cost
 Abnormal waste cost
 Storage or warehousing cost unless needed for further
production
 administrative overheads unrelated to production
 selling costs
 Financing charges above purchase price for normal
credit terms
 COST MEASUREMENT
TECHNIQUES:
 2 techniques use:
1. Standard cost method: used for accounts of normal
level of materials, supplies, labours, efficiency and
capacity utilization.
• Regularly reviewed methods.
2. Retail methods: used in retail industry for measuring
large number of rapidly changing items.
• cost is determined by reducing the sales value of
inventory by percentage gross margin.
 COST FORMULA:
 Assign recent costs to ending inventories
 three types of cost formulas used depending upon the
nature of inventory
 NOT Interchangeable inventory:
• specific cost formula
 Interchangeable inventory:
• first-in, first out (FIFO)
• weighted average
 SPECIFIC COST FORMULA:
 this means that specific costs are attributed to
specific costs of inventory
 used for non interchangeable items
 For goods and services produced and segregated for
specific projects
 this formula is inappropriate when there are large
number of items that are changeable
 For same nature of inventories same cost formulas
should be used
 For inventories with different natures different formulas
may be used.

 FIFO: cost of latest purchases ends up in cost of

ending inventory, cost of earliest purchases are in cost
of goods sold
 Weighted average: weighted average cost of all
goods available for sale ends up in both ending
inventory and cost of goods sold
 NET REALIZABLE VALUE
(NRV):
 NRV is the estimated selling price of items in business
less than the estimated costs of completion and
estimated costs of sale
 NRV is usually taken out of those items that are
damaged of obsolete and cannot be sold on actual prices
 in the write down period NRV is recorded as expense
 RECOGNIZE EXPENSE :
 Carrying amount of sold inventories is recognized as
expense in period when revenue is recognized
 Inventory losses or write down NRV in period of write
down or loss is also recorded as expense
 Any reversal of any write down entry due to any
increased NRV is recognized as a deduction in
inventories quantity and ultimately recorded as an
expense
 Other asset inventories are also recognized as expense
 It includes inventories used as a part of self constructed
property, plant or equipment
 DISCLOSURE:
 Accounting policies in for inventory measurement
 Total carrying out amount of inventories
 carrying amount of any inventories carried at fair value
less costs to sell
 All inventories that are recognized as expense including
write down entries and reversal of write down
inventories
 circumstances that led to the reversal of write down
inventories
 Carrying amount of inventoried used as a security for
laibility
 CONTD…
 Carrying amount in each category of inventory
(materials, WIP, finished goods, production
supplies, merchandise) and in total
 Carrying amount of any inventory measured at fair
value less costs to sell
 Carrying amount of inventory pledged as collateral
for liabilities