Ind AS 2 – Inventories, Indian Accounting Standard 2 (IndAS 2)

IndAS 2 – Inventories constitute a major portion of current assets of an entity. A primary issue in accounting for inventories is the amount of cost to be recognised as an asset and carried forward until the related revenues are recognised.

Ind AS 2 prescribes the accounting treatment for inventories, such as, determination of cost and its subsequent recognition as expense, including any write-downs of inventories to net realisable value and reversal of write downs.

Indian Accounting Standard (IndAS 2)

Scope of IndAS 2

Ind AS 2 applies to all inventories, except financial instruments (Ind AS 32, Financial Instruments: Presentation and Ind AS 109, Financial Instruments); and biological assets (i.e., living animals or plants) related to agricultural activity and agricultural produce at the point of harvest (Ind AS 41, Agriculture)

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 materials or supplies to be consumed in the production process or in the rendering of services.

The Standard prescribes that the inventories shall be measured at the lower of cost and net realisable value. Cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made, of the amount the inventories are expected to realise.

Inventory

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

Cost of Inventories

The cost of inventories shall be assigned by using the first-in first-out (FIFO) or weighted average cost formula. An entity shall use the same cost formula for all inventories having a similar nature and use to the entity.

COST OF INVENTORY = COST OF PURCHASE + COST OF CONVERSION + OTHER COST

1) Cost of Purchase

  • Computed on the basis of formula except specifically indentified.
  • Formula allowed is FIFO or weighted average cost method.
  • Standard Cost Method also allowed by IAS considering the market conditions of item.

EXAMPLE: FIFO AND WEIGHTED AVERAGE COST METHOD

Date of Purchase Quantity Purchased Rate per KG TOTAL COST Quantity Cleared for production Balance of Quantity in STOCK
02/04/2XXX 100 100 10000 90 10
05/05/2XXX 200 90 18000 150 60
06/07/2XXX 250 95 23750 300 10
07/09/2XXX 400 80 32000 250 160
08/12/2XXX 100 110 11000 150 110
03/02/2XXX 150 125 18750 200 60
Closing Quantity Rate Applicable Closing Stock Value
Valuation as per FIFO Method

(Price of Last purchase taken for valuation)

60 125 7500
Valuation as per Weighted Avg. Cost Method

(Rate applicable to valuation = Total Purchase Cost/Total Qty Purchase)

60 94.5833 5675

2) Cost of Conversion

  • Comprises of direct costs including variable and fixed overhead.
  • Fixed overhead is charged on the basis of normal capacity of the unit. Normal capacity means average capacity.

3) Other Costs

  • Included in the cost of inventory to the extent that they are incurred in bringing the inventories to their present location and conditions. If specifically identified to a particular product then should be included in the cost of that particular product.
  • Financing cost, if inventory purchased on deferred payment method then the difference between normal price and price charged by vendor under credit terms shall be shown under finance expense as interest cost and therefore will not form part of inventory valuation.

Recognition as an Expense

When inventories are sold, the carrying amount of inventories shall be recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down to net realisable value and all losses of inventories shall be recognised as an expense in the period in which the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

Must Read –

Circumstances under which inventories are write down to net realisable value

  • In case of damaged inventories
  • Inventory partially/ completely obsolete
  • In case where finished goods in which raw material will be used is expected to be sold below cost of finished goods.

Reversal of written down of inventories

  • Separate disclosure should be given under notes to accounts for reversal of write down if realisable value of inventories increased above cost.

DISCLOSURE IN NOTES TO ACCOUNTS Under IndAS 2

  • Policies adopted in measuring inventories.
  • Value of inventories in different head of inventories like Raw material, WIP, Finished goods and stores and tools.
  • Written down of inventories in current year and their reversal.
  • Inventories pledged as security.