As per International Accounting Standard (IAS-2) inventories to be measured at the lower of cost and net realizable value (NRV). The Standard also outline acceptable methods to determine cost, such as first in first out (FIFO) and weighted average cost.
Scope of Inventory
As per IAS 2, inventory includes assets held for sale in the ordinary course of business (finished goods), work in process, and materials and supplies that are using in production process i.e raw materials.
Howevr, IAS 2 don’t consider following items as inventory:
- work in process arising under construction contracts.
- financial instruments
- biological assets related to agricultural activity and agricultural produce at the point of harvest.
Measurement of Inventories
Inventories should recorded at the lower of cost and net realizable value.
Cost of inventories is the cost incurred in bringing the inventories to their present location and condition, including the purchase cost and conversion costs.Cost comprises as purchase price (excluding trade discount, rebate etc), irrecoverable taxes, carrying cost, handling and other costs directly attributable to their acquisition.Conversion costs include to the production such as labour costs and systematically allocated fixed and variable production overhead costs incurred in producing finished goods.
Net realizable value is the estimated selling price less estimated cost of completion and the estimated costs necessary to make the sale.
Inventory cost should not include:
- abnormal waste
- storage costs
- Administrative overheads
- selling costs
- foreign exchange differences
- interest cost when inventories are purchased with deferred settlement terms
Recognition as an expenses
- When inventories are sold, the carrying amount of those inventories should be recognized as expenses in the period in which the revenue is recognized.
- Any losses of inventories and the amount write-down to net realizable value shall be recognized as expenses in the period in which the loss or write down occurs.
- The amount of any reversal of any write-down of inventories that resulted from increase in the net realizable value shall be recognized as a reduction in the inventory expenses in the period in which the reversal occurs.
Disclosure in Financial Statements
The following shall be disclosed in the financial statements:
- accounting policy for inventories
- carrying amount, generally classified as merchandise, supplies, materials, work in progress, and finished goods. The classifications depend on what is appropriate for the entity
- carrying amount of any inventories carried at fair value less costs to sell
- amount of any write-down of inventories recognized as an expense in the period
- amount of any reversal of a write-down to NRV and the circumstances that led to such reversal
- carrying amount of inventories pledged as security for liabilities
- cost of inventories recognized as expense (cost of goods sold).