Accounting for Inventories
AS-2 Valuation of Inventories
IAS-2 Inventories
INDAS-2 Inventories
Important Points are as follows
1. Matching Concept is the relevant concept for Inventories
2. Definition
Inventories Consists of the following
- Held for sale in the ordinary course of business(finished goods)
- In the process of production of such sale(raw material and work-in-progress)
- 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 INDAS-2.Only difference is in the Presentation of financial statements with respect to inventories
4. Differences between AS2 and IAS-2 and INDAS-2
|
As-2 |
IAS -2 and INDAS-2 |
| 1.Standard does not apply to the measurement of Inventories held by Commodity Broker –Traders who measure their Inventories at fair value less Costs to sell | 1. No scope Exception for Inventories held by Commodity brokers |
| 2.Inventories purchased on deferred settlement terms are not explicitly dealt With in the accounting standard on Inventories | 2.Difference between the purchase price of Inventories for normal credit terms and the amount paid for deferred settlement terms is recognized as largest expense |
| 3.Consistent Application of same Cost Formula is not required | 3.Consistent Application of Same Cost Formula is recognized. |
| 4.Reversal of Writ –down of Inventories is not recognized. | 4.Write-down of inventories is recognized. |
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
A detaied statement showing costs is as follows
| Particulars | Amount
|
| . Direct Materials (Including Purchase Cost)
. Direct wages . Direct Expenses Prime Cost Add: Factory Overhaeds i. Fixed ii. Variable Works Cost Add: Office and Administration Overhead(only a portion is required) |
7. 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
8. Cost of Inventories of a service provider.
At the cost of their production.
9. Cost formula
a. Specific Identification method
b. Where Specific Identification method is not applicable
i. First in First Out(FIFO)
ii. Weighted Average Cost
c. Cost of Inventories in certain conditions
i. Standard Cost
ii. Retail Method
10.Net Realizable Value.
Estimated Selling Price
Less
Estimated Cost of Completion and estimated cost to make sale
11.Recognition
- Expenses—-Carrying amount(When sold)
- Write down to net realizable value—-Loss
- Reversal of write down—reduction in expense.
12.Disclosures in the financial statement
The following statement should disclose the following
As an Asset
- Classification of Inventories
- Carrying Value
- Cost formula
As an Expense
- Amount recognized as an expense
- Write down /reversal of write down
- Inventories Pledged
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