IFRS- Inventory

1. Inventories
IAS 2

2. Inventories
• Learning Outcomes
• Measure and value inventories
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3. Definition
• Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the
production process or in the rendering of services
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4. Definition
K Ltd is in the business of buying and selling laptops. For the company, the
laptops are inventory since the company trades into laptops.
K Ltd sells mobiles. Mobiles, to the extent they are incomplete, would form
part of work-in-progress, and are a part of inventory for K Ltd.
K Ltd manufactures and sells cars. The components for the cars are bought
from other companies. These materials and components are consumed in
the production process, and would form part of the inventory
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5. Cost of inventory
The cost of inventories shall comprise all costs of purchase,
costs of conversion and other costs incurred in bringing the
inventories to their present location and condition.
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6. Cost of purchase
Purchase price;
Import duties and other taxes (other than those subsequently
recoverable by the entity from the taxing authorities);
Transport, handling and other costs directly attributable to the
acquisition of finished goods, materials and services;
Borrowing Costs (for qualifying assets).
Trade discounts, rebates and other similar items are deducted
in determining the costs of purchase.
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7. Cost of conversion
Direct labour;
A systematic allocation of fixed and variable production
overheads incurred in converting materials into finished goods.
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8. Other costs
Only to the extent that they are incurred in bringing the
inventories to their present location and condition.
For example, the costs of designing products for specific
customers
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9. Other costs
• K Ltd manufactures laptops as a standard product. T Ltd
approaches K Ltd to manufacture laptops with a specific
design symbolising T Ltd’s brand and logo.
• Cost of this design would be included in the inventory to the
extent of manufacture for T Ltd.
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10. Excluded from costs
(a) abnormal amounts of wasted materials, labour or other
production costs;
(b) storage costs, unless necessary in the production process
before a further production stage;
(c) administrative overheads not contributing to bringing
inventories to their present location and condition; and
(d) selling costs.
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11. Valuation method
• FIFO or
• Weighted average
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12. Standard Costs
• IAS 2 permits the use of Standard Costs (used predominantly
in manufacturing companies).
• Any deviations are reported in SOCI
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13. Measurement of inventory
IAS 2 provides that the inventory should be measured at cost
or net realisable value, whichever is lower.
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14. Net realisable value
Most reliable estimate available:
K Ltd has 10,000 units of goods in inventory on the reporting date.
Cost of a unit is $50. However, the sale price of units sold
immediately after the reporting date is $45 per unit.
Purpose for which the inventory is held
K Ltd is in the business of trading of laptops. The company provides
a discount of 20% on the cost price if an employee buys a laptop
from K Ltd. Of the 1,000 units of laptops lying at K Ltd’s
warehouse on the reporting date, 10 are meant to be sold to
employees. Cost of a laptop to the company is $400.
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15. Thanks