Indian Accounting Standard (Ind AS) 2

Inventories Contents
OBJECTIVE SCOPE "E#I$ITIO$S 'EAS()E'E$T O# I$VE$TO)IES Cost o, inventories Costs of purchase Costs of conversion Other costs Cost of inventories of a service provider Cost of agricultural produce harvested from biological assets Techni ues for the measurement of cost Cost ,or.u/as $et rea/isa1/e va/ue )ECO2$ITIO$ AS A$ E3PE$SE "ISC5OS()E APPE$"ICES A6 )e,erences to .atters contained in other Indian Accounting Standards 16 Co.parison 7ith IAS 28 Inventories Paragraphs 1 2! %& * ++ 1- 22 11 12-14 15-18 19 20 21-22 2+ 20 2& ++ +4 +! +% +*

Indian Accounting Standard (Ind AS) 2 Inventories

(This Indian Accounting Standard includes paragraphs set in bold type and plain type, which have equal authority. Paragraphs in bold italic type indicate the main principles.)

O19ective
1! The ob"ective of this #tandard is to prescribe the accounting treatment for inventories! $ primar% issue in accounting for inventories is the amount of cost to be recognised as an asset and carried for&ard until the related revenues are recognised! This #tandard deals &ith the determination of cost and its subse uent recognition as an e'pense( including an% &rite-do&n to net realisable value! )t also deals &ith the cost formulas that are used to assign costs to inventories!

Scope
26 This Standard app/ies to a// inventories8 e:cept; *a+ 7or< in progress arising under construction contracts8 inc/uding direct/= re/ated service contracts (see Ind AS 118 Construction Contracts> ,inancia/ instru.ents (see Ind AS +* 8 #inancia/ Instru.ents; )ecognition and 'easure.ent and Ind AS +28 #inancia/ Instru.ents; Presentation)> and 1io/ogica/ assets (i6e68 /iving ani.a/s or p/ants) re/ated to agricu/tura/ activit= and agricu/tura/ produce at the point o, harvest (See Ind AS 418 Agricu/ture1)

*b+

*c+

+6

This Standard does not app/= to the .easure.ent o, inventories he/d 1=; (a) producers o, agricu/tura/ and ,orest products8 agricu/tura/ produce a,ter harvest8 and .inera/s and .inera/ products8 to the e:tent that the= are .easured at net rea/isa1/e va/ue in accordance 7ith 7e// esta1/ished practices in those industries6 ?hen such inventories are .easured at net rea/isa1/e va/ue8 changes in that va/ue are recognised in pro,it or /oss in the period o, the change6

)ndian $ccounting #tandard *)nd $# + 41( Agriculture( is under formulation!

*b+

co..odit= 1ro<er traders 7ho .easure their inventories at ,air va/ue /ess costs to se//6 ?hen such inventories are .easured at ,air va/ue /ess costs to se//8 changes in ,air va/ue /ess costs to se// are recognised in pro,it or /oss in the period o, the change6

4! The inventories referred to in paragraph ,*a+ are measured at net realisable value at certain stages of production! This occurs( for e'ample( &hen agricultural crops have been harvested or minerals have been e'tracted and sale is assured under a for&ard contract or a government guarantee( or &hen an active mar-et e'ists and there is a negligible ris- of failure to sell! These inventories are e'cluded from onl% the measurement re uirements of this #tandard! 5! .ro-er-traders are those &ho bu% or sell commodities for others or on their o&n account! The inventories referred to in paragraph ,*b+ are principall% ac uired &ith the purpose of selling in the near future and generating a profit from fluctuations in price or bro-er-traders/ margin! 0hen these inventories are measured at fair value less costs to sell( the% are e'cluded from onl% the measurement re uirements of this #tandard!

"e,initions
%6 The ,o//o7ing ter.s are used in this Standard 7ith the .eanings speci,ied; Inventori es are assets; *a+ *b+ *c+ he/d ,or sa/e in the ordina r= course o, 1usiness> in the process o, production ,or such sa/e> or in the ,or. o, .ateria/s or supp/ies to 1e consu.ed in the production process or in the rendering o, services6

$et rea/isa1/e va/ue is the esti.ated se//ing price in the ordin ar= course o, 1usiness /ess the esti.a ted costs o, co.p/etion and the esti.ated costs necessar= to .a<e the sa/e6 #air va/ue is the a.ount ,or 7hich an asset cou/d 1e e:changed8 or a /ia1i/it= sett/ed8 1et7een <no7/edgea1/e8 7i//ing parties in an ar.@s /ength transaction6 1! 2et realisable value refers to the net amount that an entit% e'pects to realise from the sale of inventor% in the ordinar% course of business! 3air value reflects the amount for &hich the same inventor% could be e'changed bet&een -no&ledgeable and &illing bu%ers and sellers in the mar-etplace! The former is an entit%-specific value4 the latter is not! 2et realisable value for inventories ma% not e ual fair value less costs to sell! ,

8! )nventories encompass goods purchased and held for resale including( for e'ample( merchandise purchased b% a retailer and held for resale( or land and other propert% held for resale! )nventories also encompass finished goods produced( or &or- in progress being produced( b% the entit% and include materials and supplies a&aiting use in the production process! )n the case of a service provider( inventories include the costs of the service( as described in paragraph 19( for &hich the entit% has not %et recognised the related revenue (see )nd $# 18, evenue)!

'easure.ent o, inventories
*6 Inventories sha// 1e .easured at the /o7er o, cost and net rea/isa1/e va/ue6

Cost o, inventories
1-6 The cost o, inventories sha// co.prise a// costs o, purchase8 costs o, conversion and other costs incurred in 1ringing the inventories to their present /ocation and condition6 Costs o, purchase 11! The costs of purchase of inventories comprise the purchase price( import duties and other ta'es *other than those subse uentl% recoverable b% the entit% from the ta'ing authorities+( and transport( handling and other costs directl% attributable to the ac uisition of finished goods( materials and services! Trade discounts( rebates and other similar items are deducted in determining the costs of purchase! Costs o, conversion 12! The costs of conversion of inventories include costs directl% related to the units of production( such as direct labour! The% also include a s%stematic allocation of fi'ed and variable production overheads that are incurred in converting materials into finished goods! 3i'ed production overheads are those indirect costs of production that remain relativel% constant regardless of the volume of production( such as depreciation and maintenance of factor% buildings and e uipment( and the cost of factor% management and administration! 5ariable production overheads are those indirect costs of production that var% directl%( or nearl% directl%( &ith the volume of production( such as indirect materials and indirect labour! 1,! The allocation of fi'ed production overheads to the costs of conversion is based on the normal capacit% of the production facilities! 2ormal capacit% is the production e'pected to be achieved on average over a number of periods or seasons under normal circumstances( ta-ing into account the loss of capacit% resulting from planned maintenance! The actual level of production ma% be used if it appro'imates normal capacit%! The amount of fi'ed overhead allocated to each unit of production is not increased as a conse uence of lo& production or idle plant! 6nallocated overheads are recognised as an e'pense in the period in &hich the% are incurred! )n periods of abnormall% high production( the amount of fi'ed overhead allocated to each unit of production is decreased so that inventories are not measured above cost! 4

5ariable production overheads are allocated to each unit of production on the basis of the actual use of the production facilities! 14! $ production process ma% result in more than one product being produced simultaneousl%! This is the case( for e'ample( &hen "oint products are produced or &hen there is a main product and a b%-product! 0hen the costs of conversion of each product are not separatel% identifiable( the% are allocated bet&een the products on a rational and consistent basis! The allocation ma% be based( for e'ample( on the relative sales value of each product either at the stage in the production process &hen the products become separatel% identifiable( or at the completion of production! 7ost b%-products( b% their nature( are immaterial! 0hen this is the case( the% are often measured at net realisable value and this value is deducted from the cost of the main product! $s a result( the carr%ing amount of the main product is not materiall% different from its cost! Other costs 15! Other costs are included in the cost of inventories onl% to the e'tent that the% are incurred in bringing the inventories to their present location and condition! 3or e'ample( it ma% be appropriate to include non-production overheads or the costs of designing products for specific customers in the cost of inventories! 18! 9'amples of costs e'cluded from the cost of inventories and recognised as e'penses in the period in &hich the% are incurred are: *a+ *b+ *c+ *d+ abnormal amounts of &asted materials( labour or other production costs4 storage costs( unless those costs are necessar% in the production process before a further production stage4 administrative overheads that do not contribute to bringing inventories to their present location and condition4 and selling costs!

11! )nd $# 2,( !orrowing "osts, identifies limited circumstances &here borro&ing costs are included in the cost of inventories! 18! $n entit% ma% purchase inventories on deferred settlement terms! 0hen the arrangement effectivel% contains a financing element( that element( for e'ample a difference bet&een the purchase price for normal credit terms and the amount paid( is recognised as interest e'pense over the period of the financing! Cost o, inventories o, a service provider 19! To the e'tent that service providers have inventories( the% measure them at the costs of their production! These costs consist primaril% of the labour and other costs of personnel directl% engaged in providing the service( including supervisor% personnel( and attributable overheads! ;abour and other costs relating to sales and 5

general administrative personnel are not included but are recognised as e'penses in the period in &hich the% 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 b% service providers! Cost o, agricu/tura/ produce harvested ,ro. 1io/ogica/ assets2 20! )n accordance &ith )nd $# 41( Agriculture( inventories comprising agricultural produce that an entit% 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 #tandard! TechniAues ,or the .easure.ent o, cost 21! Techni ues for the measurement of the cost of inventories( such as the standard cost method or the retail method( ma% be used for convenience if the results appro'imate cost! #tandard costs ta-e into account normal levels of materials and supplies( labour( efficienc% and capacit% utilisation! The% are regularl% revie&ed and( if necessar%( revised in the light of current conditions! 22! The retail method is often used in the retail industr% for measuring inventories of large numbers of rapidl% changing items &ith similar margins for &hich it is impracticable to use other costing methods! The cost of the inventor% is determined b% reducing the sales value of the inventor% b% the appropriate percentage gross margin! The percentage used ta-es into consideration inventor% that has been mar-ed do&n to belo& its original selling price! $n average percentage for each retail department is often used!

Cost #or.u/as
2+6 The cost o, inventories o, ite.s that are not ordinari/= interchangea1/e and goods or services produced and segregated ,or speci,ic pro9ects sha// 1e assigned 1= using speci,ic identi,ication o, their individua/ costs6 24! #pecific identification of cost means that specific costs are attributed to identified items of inventor%! This is the appropriate treatment for items that are segregated for a specific pro"ect( regardless of &hether the% have been bought or produced! <o&ever( specific identification of costs is inappropriate &hen there are large numbers of items of inventor% that are ordinaril% interchangeable! )n such circumstances( the method of selecting those items that remain in inventories could be used to obtain predetermined effects on profit or loss! 2!6 The cost o, inventories8 other than those dea/t 7ith in paragraph 2+8 sha// 1e assigned 1= using the ,irst in8 ,irst out (#I#O) or 7eighted average cost ,or.u/a6 An entit= sha// use the sa.e cost ,or.u/a ,or a// inventories having a si.i/ar nature and use to the entit=6 #or inventories 7ith a di,,erent nature or use8 di,,erent cost ,or.u/as .a= 1e 9usti,ied6
2

)ndian $ccounting #tandard *)nd $# + 41( Agriculture( is under formulation! $ccordingl%( this paragraph &ould be effective from the date )nd $# 41( Agriculture, comes into effect!

28! 3or e'ample( inventories used in one operating segment ma% have a use to the entit% different from the same t%pe of inventories used in another operating segment! <o&ever( a difference in geographical location of inventories *or in the respective ta' rules+( b% itself( is not sufficient to "ustif% the use of different cost formulas! 21! The 3)3O formula assumes that the items of inventor% that &ere purchased or produced first are sold first( and conse uentl% the items remaining in inventor% at the end of the period are those most recentl% purchased or produced! 6nder the &eighted average cost formula( the cost of each item is determined from the &eighted 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 ma% be calculated on a periodic basis( or as each additional shipment is received( depending upon the circumstances of the entit%!

$et rea/isa1/e va/ue

28! The cost of inventories ma% not be recoverable if those inventories are damaged( if the% have become &holl% or partiall% obsolete( or if their selling prices have declined! The cost of inventories ma% also not be recoverable if the estimated costs of completion or the estimated costs to be incurred to ma-e the sale have increased! The practice of &riting inventories do&n belo& cost to net realisable value is consistent &ith the vie& that assets should not be carried in e'cess of amounts e'pected to be realised from their sale or use! 29! )nventories are usuall% &ritten do&n to net realisable value item b% item! )n some circumstances( ho&ever( it ma% be appropriate to group similar or related items! This ma% be the case &ith items of inventor% relating to the same product line that have similar purposes or end uses( are produced and mar-eted in the same geographical area( and cannot be practicabl% evaluated separatel% from other items in that product line! )t is not appropriate to &rite inventories do&n on the basis of a classification of inventor%( for e'ample( finished goods( or all the inventories in a particular operating segment! #ervice providers generall% accumulate costs in respect of each service for &hich a separate selling price is charged! Therefore( each such service is treated as a separate item! ,0! 9stimates 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 e'pected to realise! These estimates ta-e into consideration fluctuations of price or cost directl% relating to events occurring after the end of the period to the e'tent that such events confirm conditions e'isting at the end of the period! ,1! 9stimates of net realisable value also ta-e into consideration the purpose for &hich the inventor% is held! 3or e'ample( the net realisable value of the uantit% of inventor% held to satisf% firm sales or service contracts is based on the contract price! )f the sales contracts are for less than the inventor% uantities held( the net realisable value of the e'cess is based on general selling prices! =rovisions ma% arise from firm sales contracts in e'cess of inventor% uantities held or from firm purchase contracts! #uch provisions are dealt &ith under )nd $# ,1 ( Provisions, "ontingent #iabilities and "ontingent Assets. 1

,2! 7aterials and other supplies held for use in the production of inventories are not &ritten do&n belo& cost if the finished products in &hich the% &ill be incorporated are e'pected to be sold at or above cost! <o&ever( &hen a decline in the price of materials indicates that the cost of the finished products e'ceeds net realisable value( the materials are &ritten do&n to net realisable value! )n such circumstances( the replacement cost of the materials ma% be the best available measure of their net realisable value! ,,! $ ne& assessment is made of net realisable value in each subse uent period! 0hen the circumstances that previousl% caused inventories to be &ritten do&n belo& cost no longer e'ist or &hen there is clear evidence of an increase in net realisable value because of changed economic circumstances( the amount of the &rite-do&n is reversed *ie the reversal is limited to the amount of the original &rite-do&n+ so that the ne& carr%ing amount is the lo&er of the cost and the revised net realisable value! This occurs( for e'ample( &hen an item of inventor% that is carried at net realisable value( because its selling price has declined( is still on hand in a subse uent period and its selling price has increased!

)ecognition as an e:pense
+46 ?hen inventories are so/d8 the carr=ing a.ount o, those inventories sha// 1e recognised as an e:pense in the period in 7hich the re/ated revenue is recognised6 The a.ount o, an= 7rite do7n o, inventories to net rea/isa1/e va/ue and a// /osses o, inventories sha// 1e recognised as an e:pense in the period the 7rite do7n or /oss occurs6 The a.ount o, an= reversa/ o, an= 7rite do7n o, inventories8 arising ,ro. an increase in net rea/isa1/e va/ue8 sha// 1e recognised as a reduction in the a.ount o, inventories recognised as an e:pense in the period in 7hich the reversa/ occurs6 ,5! #ome inventories ma% be allocated to other asset accounts( for e'ample( inventor% used as a component of self-constructed propert%( plant or e uipment! )nventories allocated to another asset in this &a% are recognised as an e'pense during the useful life of that asset!

"isc/osure
+%6 The ,inancia/ state.ents sha// disc/ose; (a) the accounting po/icies adopted inc/uding the cost ,or.u/a used> in .easuring inventories8

(1) the tota/ carr=ing a.ount o, inventories and the carr=ing a.ount in c/assi,ications appropriate to the entit=> (c) the carr=ing a.ount o, inventories carried at ,air va/ue /ess costs to se//> 8

(d) the a.ount o, inventories recognised as an e:pense during the period> (e) the a.ount o, an= 7rite do7n o, inventories recognised as an e:pense in the period in accordance 7ith paragraph +4> (,) the a.ount o, an= reversa/ o, an= 7rite do7n that is recognised as a reduction in the a.ount o, inventories recognised as e:pense in the period in accordance 7ith paragraph +4> (g) the circu.stances or events that /ed to the reversa/ o, a 7rite do7n o, inventories in accordance 7ith paragraph +4> and (h) the carr=ing a.ount o, inventories p/edged as securit= ,or /ia1i/ities6 ,1! )nformation about the carr%ing amounts held in different classifications of inventories and the e'tent of the changes in these assets is useful to financial statement users! Common classifications of inventories are merchandise( production supplies( materials( &or- in progress and finished goods! The inventories of a service provider ma% be described as &or- in progress! ,8! >?efer to $ppendi' 1@

,9! $n entit% adopts a format for profit or loss that results in amounts being disclosed other than the cost of inventories recognised as an e'pense during the period! 6nder this format( the entit% presents an anal%sis of e'penses using a classification based on the nature of e'penses! )n this case( the entit% discloses the costs recognised as an e'pense for ra& materials and consumables( labour costs and other costs together &ith the amount of the net change in inventories for the period!

Appendi: A )e,erences to .atters contained in other Indian Accounting Standards

This Appendi$ is an integral part o% Indian Accounting Standard (Ind AS) &! This appendi' lists the appendi' &hich is a part of another )ndian $ccounting #tandard and ma-es reference to )nd $# 2( Inventories 1! $ppendi' $( Intangible Assets'(eb site "osts contained in )nd $# ,8( Intangible Assets.

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Appendi: 1

)ote* This Appendi$ is not a part o% Indian Accounting Standard (Ind AS) &, Inventories. The purpose o% this Appendi$ is only to bring out the di%%erences between Indian Accounting Standard and the corresponding International Accounting Standard (IAS) &, Inventories.

Co.parison 7ith IAS 28 Inventories

1! =aragraph ,8 of )$# 2 dealing &ith recognition of inventories as an e'pense based on function-&ise classification( has been deleted -eeping in vie& the fact that option provided in )$# 1 to present an anal%sis of e'penses recognised in profit or loss using a classification based on their function &ithin the entit% has been removed and )nd $# 1 re uires onl% nature-&ise classification of e'penses! <o&ever( in order to maintain consistenc% &ith paragraph numbers of )$# 2( the paragraph number is retained in )nd $# 2!

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