AS 2 – Valuation of Inventories prescribes accounting treatment for inventories and sets the guidelines to determine value at which inventories are carried in  financial statements.

Indian Accounting Standard (Ind AS) 2, Inventories, prescribes the accounting treatment for inventories, such as, measurement of inventories, recognition of inventories as expense and disclosure etc.

S. No. Ind AS 2 AS 2
1 Subsequent recognition of cost/carrying amount of inventories as an expense. AS 2 does not provide this.
2 Provides detailed guidance in case of subsequent assessment of NRV.  It also deals with the reversal of the write-down of inventories to NRV. No such concept of reversal.
3 Ind AS 2 allows free choice between FIFO and weighted average methods (clarified in education material issued by ICAI). AS 2 specifically provides that the formula used in determining the cost of inventory should reflect the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition.
4 Ind AS 2 requires more disclosures as compared to the AS 2 Ind AS 2 requires more disclosures as compared to the AS 2
5 Scope exclusion under this Ind AS is different for the products at the point of harvest and after harvest.

Scope excludes accounting of biological assets related to agricultural activity and agricultural produce at the point of harvest.

Not applicable to measurement of inventories held by producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at NRV in accordance with well-established practices in those industries.

When such inventories are measured at NRV, changes in that value are recognised in profit or loss.

Further, except measurement, other requirements of this Ind AS are still applicable in this case (for e.g., disclosure requirements shall apply).

Scope excludes accounting of livestock inventory, agricultural and forest products, mineral oils, ores and gases to the extent measured at NRV.

AS 2 was silent on recognition of this gain/loss.

6 Not applicable to measurement of inventories held by commodity broker-traders who measure their inventories at FV (fair value) less costs to sell. When such inventories are measured at FV less costs to sell, changes in FV less costs to sell are recognised in profit or loss in the period of the change.

Further, except measurement, other requirements of this Ind AS are still applicable in this case (for e.g., disclosure requirements shall apply).

AS 2 does not exclude inventories held by commodity broker-traders.
7 Ind AS 2 defines FV and provides an explanation in respect of distinction between ‘NRV’ and ‘FV’.

 

The AS 2 does not contain concept of FV and such explanation.

 Measurement of Inventories:

Inventories shall be measured at the lower of cost and NRV.

Cost comprise – cost of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition.

Costs excludes:

  • Abnormal amount of wasted material, labour or other production costs;
  • Storage cost, unless necessary in the production process before a further production stage;
  • Administrative overheads
  • Selling costs (includes distribution costs also)

When inventory is purchased on deferred settlement terms (i.e., contains financing element): interest will be recognised as expense over the period of financing.

Interest amount:  Amount paid – Purchase price (for normal credit terms)

Techniques for the measurement of cost:

Standard cost method: take into account normal levels of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revised.

Retail method:

Cost = Sale price if inventory minus percentage gross margin. (Often used in the retail industry for measuring inventories of large numbers of rapidly changing items with similar margins for which it is impracticable to use other costing methods.

Cost formulas:

The inventories that are not ordinarily interchangeable and goods/services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs.

Other inventories – FIFO or weighted average cost

An entity shall use the same cost formula for all inventories having similar and use.

For example, inventories used in one operating segment may have a different use from the same type of inventories used in another operating segment.

However, difference in geographical location of inventories is not sufficient to justify the use of different cost formulas.

NRV

Estimates of NRV also take into consideration the purpose for which the inventory is held. For example, the NRV of the quantity of inventory held to satisfy contracts is based on the contract price. If the sales contracts are for less quantity than the quantities held, the NRV of the excess is based on general selling prices.

The cost of inventories may not be recoverable if those inventories are damaged, become wholly or partially obsolete, or their selling prices have declined. In such cases, inventories shall be write down to NRV. However, inventories are not written down if the finished products (in which they will be incorporated) are expected to be sold above cost.

A new assessment is made of NRV in each subsequent period. When there is clear evidence of an increase in NRV, the amount of the write-down is reversed (i.e., the reversal is limited to the amount of the original write-down) so that the new carrying amount is the lower of the cost and the revised NRV.

Amount of reversal of write-down: Inventories amount recognised as an expense shall be reduced by that amount.

Inventories may be allocated to other asset accounts, for example, inventory used as a component of self-constructed property, plant or equipment. Inventories allocated to another asset in this way are recognised as an expense during the useful life of that asset.

When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised. 

Disclosures:

  • accounting policies adopted in measuring inventories, including the cost formula used;
  • total carrying amount of inventories and the carrying amount in classifications appropriate to the entity (common classifications: merchandise, production supplies, materials, work in progress and finished goods);
  • the carrying amount of inventories carried at fair value less costs to sell;
  • amount of inventories recognised as an expense during the period;
  • the amount of any write-down of inventories recognised as an expense;
  • amount of any reversal of any write-down that is recognised as a reduction inventories amount recognised as expense;
  • the circumstances or events that led to the reversal of a write-down of inventories; and
  • carrying amount of inventories pledged as security for liabilities.

(pledge would include all charges/encumbrances where restriction has been put by the charge holder on the use of that asset)

Meanings of terms used in the standard:

i) Inventories are assets:

  • Held for sale in the ordinary course of business;
  • In the process of production for such sale; or
  • In the form of material/supplies – to be consumed in the production process or in the rendering of services.

ii) NRV = Estimated selling price in the ordinary course of business – estimated completion costs and costs necessary to make the sale.

iii) Fair value (FV) reflects the price at which an orderly transaction to sell the same inventory in the principal (or most advantageous) market for that inventory would take place between market participants at the measurement date.

NRV is an entity-specific value; FV is not. NRV for inventories may not equal FV less costs to sell.

Example: An entity holds inventories of 1000 units and its market selling price @ Rs.10/- each after selling expenses. The entity has an order in hand to sell the inventories @ Rs. 11/-. In this situation, FV is Rs 10/- each, but NRV is Rs. 11/- each.

iv) Cost of purchase: purchase price including duties and taxes (other than those recoverable), transport and other expenditure directly related to acquisition.

Trade discounts, duty drawbacks and other similar items are deductible from cost.

v) Cost of conversion: directly related to units of production (e.g., direct labour), it also includes allocation of fixed and variable production overheads incurred in converting materials into finished goods.

vi) Broker-traders are those who buy or sell commodities for others or on their own account. The inventories are principally acquired with the purpose of selling in the near future and generating a profit from fluctuations in price or broker-traders’ margin. When these inventories are measured at fair value less costs to sell, they are excluded from only the measurement requirements of this Standard. 

Non Applicability:

i. Financial instruments

ii. Biological assets (Ind AS 41 – Agriculture) related to agricultural activity and produce at the point of harvest

Further, refer differences above.

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