Introduction and the Framework



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Joint products

  • Joint products
  • Allocate between products on a rational basis such as relative sales value of products when they become separable
  • If minor in value, do not allocate: measure by-product at net realizable value and deduct this amount from main product costs

Other inventoriable costs

  • IAS 2 - Measurement
  • Other inventoriable costs
  • - limited to costs to bring the inventories to their present location and condition
  • - example: amortization of capitalized development costs related to inventory
  • - borrowing costs included if for a qualifying inventory item (if measured at FV or produced in large volumes on a repetitive basis, borrowing costs may, but are not required to be capitalized)

Do not add to inventory cost:

  • IAS 2 - Measurement
  • Do not add to inventory cost:
  • Costs of abnormal waste
  • Storage or warehousing costs unless necessary for next stage of production
  • Administrative overheads not associated with production
  • Selling costs
  • Financing charges above purchase price for normal credit terms

Cost formulas permitted should:

  • IAS 2 - Measurement
  • Cost formulas permitted should:
  • Assign recent costs to ending inventory
  • Correspond closely with the actual physical flow of the goods and services
  • - Three permitted: Specific identification, First-in, first-out, and weighted average

Specific identification:

  • IAS 2 - Measurement
  • Specific identification:
  • For inventory items that are not ordinarily interchangeable
  • For goods and services produced and segregated for specific projects

FIFO and weighted average:

  • IAS 2 - Measurement
  • FIFO and weighted average:
  • FIFO – cost of latest purchases ends up in cost of ending inventory, cost of earliest purchases are in cost of goods sold
  • Weighted average – weighted average cost of all goods available for sale ends up in both ending inventory and cost of goods sold

KPMG : The Application of IFRS: Choices

  • IAS 2 - Measurement
  • KPMG : The Application of IFRS: Choices
  • in Practice – International Financial
  • Reporting Standards, December
  • 2006
  • Results indicate that the usage of the FIFO and weighted average methods are fairly evenly split by companies reporting under IFRS

Inventories reported at the LC and NRV

  • IAS 2 - Measurement
  • Inventories reported at the LC and NRV
  • Why? So not reported at more than the future cash flows into the company from their sale
  • NRV = the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs to make the sale

LC and NRV example:

  • IAS 2 - Measurement
  • LC and NRV example:
  • Cost $ 80
  • Selling price $ 84
  • Cost to complete $ 5
  • Cost to sell 10% of SP
  • NRV: $84 - $5 - $8.40 = $70.60
  • LC and NRV = $70.60

Write-downs are recognized in profit or loss

  • IAS 2 - Measurement
  • Write-downs are recognized in profit or loss
  • Subsequent write-ups permitted to maximum of prior write-downs if:
  • - changed economic circumstances and NRV has increased, prior situation no longer exists
  • Reversals also taken to profit or loss

Carrying amount of inventory sold is expense in same period as the related revenue

  • Carrying amount of inventory sold is expense in same period as the related revenue
  • Inventory adjustments (losses, write-downs to lower of cost and NRV, write-down reversals, etc.) are recognized as an adjustment to the expense recognized in the period

Disclosures needed for:

  • IAS 2 - Disclosure
  • Disclosures needed for:
  • Accounting policies applied
  • Inventory remaining on statement of financial position
  • Inventory costs recognized in profit or loss

Balance sheet related disclosures:

  • IAS 2 - Disclosure
  • Balance sheet related disclosures:
  • Carrying amount in each category of inventory (materials, WIP, finished goods, production supplies, merchandise) and in total
  • Carrying amount of any inventory measured at fair value less costs to sell
  • Carrying amount of inventory pledged as collateral for liabilities

Income statement related disclosures:

  • IAS 2 - Disclosure
  • Income statement related disclosures:
  • Amount of inventory recognized as an expense (usually cost of sales/cost of goods sold)
  • Amount of write-downs to NRV or other losses
  • Amount of any write-down reversals
  • Circumstances that resulted in reversals
  • Current GAAP Comparisons
  • Pages 104, 122 & 146 of 164 of
  • http://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).pdf


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