Ind-AS-2 Accounting for Inventories incorporating Companies (Indian Accounting Standards) Amendment Rules 2020

Ind-AS-2. Accounting for Inventories incorporating Companies (Indian Accounting Standards) Amendment Rules 2020I hereby want to summarize the latest provisions with respect to Ind-AS 2 –Inventories. Following are the important and latest provisions.

Companies (Indian Accounting Standards) Amendment Rules 2020.

AS-2 Valuation of Inventories

IAS-2 Inventories

Ind-AS-2 Inventories

Important Points are as follows

1. Matching Concept is the relevant concept for Inventories. As per this concept, inventories should be accounted for as an expense in the year in which it is sold. Till that time, it is accounted for as an asset, ie, closing stock.

2. Definition

Inventories Consists of the following

a. Held for sale in the ordinary course of business(finished goods)

b. In the process of production of such sale(raw material and work-in-progress)

c. In the form of materials or supplies to be consumed in production process or in the rendering of services (stores, spares, raw materials, consumables).

3. There is no major difference between IAS -2and Ind-AS-2.Only difference is in the Presentation of financial statements with respect to inventories.

4. Differences between IAS-2 and Ind-AS-2.

Ind-AS 2 IAS 2
1.Inventories expense is recognized in the changes in inventories of finished goods and work-in-progress and raw materials consumed 1.Inventories expense is recognized in the changes in inventories of finished goods and work-in-progress and raw materials consumed or inventories expense is recognized as cost of sales
2.Relevant terms are Statement of profit and loss and balance sheet  2. Relevant terms are Statement of Comprehensive Income and Statement of Financial Position

5. Measurement of Inventories

Valued at

Cost OR Net realizable value

Whichever is less

6. Cost= Cost of Purchase +Cost of Conversion +Other Costs

A. Cost of Purchase =Purchase price-Trade Discount –Rebates +Duties and non-refundable taxes +Carriage inwards+ Frieght +GST+ Forwarding Charges for external transport +Transport Insurance+ Cost for a letter reference+ Commission and brokerage paid+ Handling Costs+ Other expenditures directly attributable to the acquisition of finished goods, materials and services

B. Cost of conversion.

It includes

i. Direct Material

ii. Direct labour

iii. Direct expenses

iv. Fixed Production Overheads on normal capacity

v. Indirect material

vi. Indirect labour

vii. Other Variable Production Overheads

viii. Joint Product costs less net realizable value of by-products

ix. Normal wastage Cost of materials

x. Repairs and maintenance

C. Other costs.

Only if incurred in bringing inventories to present location and conditions

7. A detailed statement showing costs is as follows

Particulars Amount
  • Direct Materials (Including Purchase Cost)
  • Direct wages
  • Direct Expenses

Prime Cost

Add: Factory Overheads

i. Fixed

ii. Variable

Works Cost

Add: Office and Administration Overhead(only a portion is required)

8. Exclusions from Cost of Inventories.

Following Costs are excluded from the cost of Inventories

1. Abnormal amounts of wasted materials, labour and other production cost.

2. Storage cost unless those costs are necessary in the production process before further stage

3. Administrative overheads

4. Selling and distribution Cost

5. Interest cost when inventories are purchased on deferred payment basis

9. Cost of Inventories of a service provider.

(This is Omitted by the companies (Indian Accounting Standards) Amendment Rules ,2018 w.e.f 01/4/2018

10. Cost formula

a. Specific Identification method.

  • This method means directly linking the cost with specific item of inventories.
  • The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs.

Where Specific Identification method is not applicable

i. First in First Out (FIFO)

ii. Weighted Average Cost

Cost of Inventories in certain conditions

i. Standard Cost—-By considering normal levels of materials and supplies, labour, efficiency and capacity utilization.

ii. Retail Method—it is used in retail industry

An entity must use same cost formula for all inventories having a similar nature and use within the entity

11. Net Realizable Value.

  • There is a risk that inventories will be sold for less than their Cost. The reasons include :
  • -General fall in market prices for the goods
  • -Damage to the goods
  • -Obsolescence
  • -Additional costs needed to complete manufacture

12. Estimation of net realizable value

  • If the finished product in which raw material and supplies used is sold at cost or above cost ,then the estimated realizable value of raw material and supplies is considered more than its cost
  • If finished product in which raw material and supplies used is sold below cost. Then the estimated realizable value of raw material or supplies is equal to replacement price of raw material or supplies

13. Recognition

  • Expenses—-Carrying amount of the inventory —-When sold
  • Write down to net realizable value—-All Loss of inventories are recognized as an expense in the period the written down or loss occurs
  • Reversal of write down—reduction in expense in the period the reversal occurs

14. Disclosures in the financial statement

The financial statement should disclose the following

  • The financial  statement should disclose the following
  • Accounting policies adopted in measuring inventories
  • Classification of Inventories
  • Carrying amount of inventories carried at fair value less cost to sell
  • Cost formula used
  • The amount of any write-down
  • The amount of inventories recognized as an expense
  • The carrying amount of inventories pledged as security for liabilities

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