Indian Accounting Standard
(Ind AS) 2
Inventories
Contents
ü OBJECTIVE
ü SCOPE
(a)
Costs of purchase
(b)
Costs of conversion
(c)
Other costs
(d)
Cost of inventories of a service provider
(e)
Techniques for the measurement of cost
Disclaimer: This document is the
summarized form of standards and contains the opinion of Author for your
reference and Author is not liable for any liability/loss. For legal and original standard please visit: http://www.mca.gov.in/Ministry/accounting_standards.html
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To prescribe the
accounting treatment of for Inventories. The main issue in accounting of the
Inventories is the amount of the cost to be recognized as Assets & Carry
forward of amount until the related revenue are recognized.
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This Standard also deals
with the following matter:
(a) Determination
of the Cost of Inventories;
(b) Reorganization
of the Cost of Inventories;
(c) Write
down the Cost of Inventory to NRV; and
(d) Formulas
that are used to assign Cost of Inventory.
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This Standard is
Applicable to all Inventories, except the followings:
(a) Work
in progress under the Construction
Contracts under Ind AS-11 including directly related service Contract.
(b) Financial Instrument
under Ind AS – 32, 39.
(c) Biological Assets
related to the agricultural activity and agricultural produce at the point of
Harvest under Ind AS-41.
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This Standard does not
apply to measurement of Inventory held by:
(a) Producers
of the followings, to the extent that
they are measured at NRV in accordance with well-established practices in those
industries.
o
Agricultural & Forest
Products,
o
Agricultural product after
Harvest and
o
Minerals and Mineral
products.
When such inventories are
measured at NRV, changes in that value are recognized in profit or loss in the
period of the change.
(b)
Commodity Brokers/Traders, who measure
their Inventory at fair Value after deducting Cost to sell and change arise are
recognized in P&L account of the that period of the change.
Estimated
Selling Price in Ordinary Cousre of Business XXX
Less: Estimated Cost for Complition of product (xx)
Estimated Cost Necessary to make the
sale (xx)
Net Realisable Value XXX
Net Realisable Value XXX
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Fair Value
Amount
for which an asset could be exchanged or a liablitity can be settled between
knowleadgebale and willing buyers & sellers in the market place.
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Inventories
(a) Held
for the Sale in Ordinary Cousre of Business;
(b)
in the process of
production of such sale; or
(c) in the form of materials or supplies to be consumed
in the production process or in the rendering of services.
In the case of a service provider, inventories
include the costs of the service, as
described, for which the
entity has not yet recognised the related revenue (see Ind AS 18,
Revenue).
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Inventories
shall be measured at the lower of cost and net realisable value i.e. Cost or
NRV whichever is lower.
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The cost of inventories shall comprise all
costs of purchase, costs of conversion and other costs incurred in bringing the
inventories to their present location and condition.
(a) Cost of
Purchase
i.e. Purchase
Price XXX
+ Import
Duty XXX
+ Transpot
Cost/Handling XXX
+ Other
Taxes* XXX
+ Other
Cost Directly Attributable XXX
(-) Trade Discount, Rebates etc. (xx)
COST OF PURCHASE XXX
COST OF PURCHASE XXX
Notes: Other Taxes does
not include those taxes which are subsequently recoverable from the taxing
authority.
(b) Cost of
Conversion of Inventories
Direct
Cost relates to the unit of production
i.e.
Direct Wages & Direct Expense XXX
+
Allocated Fixed Cost XXX
+
Variable Production Overhead XXX
Conversion Cost XXX
Conversion Cost XXX
Notes:
1.
Allocation of Fixed Cost is based on the
Normal Capacity of production facilities. If in any year there is loss of
capacity then the unallocated overhead are recognized as expense for that
period. If there is abnormally increased in the production then per unit
allocation will be decreased so that the inventories are not measured above
cost.
2.
In Case of Joint Product and cost of
conversion can’t be separately identifiable, then the allocation should be on
rational or consistent basis (like sale value) either on the stage of in the
production process or at the completion of production.
3.
In Case of By-Product:– Most of the
by-products, by their nature, are immaterial. When this is the case, they are
often measured at net realisable value and this value is deducted from the cost
of the main product. As a result, the carrying amount of the main product is
not materially different from its cost.
(c) Other
Cost
Other
Cost also included in the cost of inventories but only to the extent that they are
incurred in bringing the inventories to their present location and condition.
But
following Cost will not include in the cost of inventories and recognized as
expense of the period.
·
Abnormal Cost related to Material, Labour
or other production cost;
·
Storage Cost unless necessary for the
production process before a further production stage;
·
Selling Cost; and
·
Administrative overheads that do not
contribute to bringing inventories to their present location and condition.
Borrowing Cost
(read Ind AS-23)
(d) Cost of
Inventories of a service provider
In
case of service provider, they measure them at the cost of their production.
These costs consist primarily of the labour and other costs of personnel
directly engaged in providing the service, including supervisory personnel, and
attributable overheads. Labour and other costs relating to sales and general
administrative personnel are not included but are recognised as expenses in the
period in which they are incurred. The cost of inventories of a service
provider does not include profit margins or non-attributable overheads that are
often factored into prices charged by service providers.
(e) Technique
for the measurement of Cost
o
Standard Cost Method
o
Retail Method
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Goods are not Interchangeable
Specific
Cost should assigned to the item by using specific identification of their
individual cost.
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Goods are Interchangeable
Use
one of the following Methods:
First
come First Out Cost Method
Weight
Average Cost method
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A new assessment is made
of NRV in each subsequent period.
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Raw Material and Supplies
used for the production are not written down below cost normally. However,
when a decline in the price of material indicates that the cost of FG exceeds
NRV, the material are written down to NRV.
F Recognition
as an Expense
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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. The amount of any write-down of inventories to net realisable value
and all losses of inventories shall be recognised as an expense in the period
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.
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Some 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.
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Policy
including the Cost formula.
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Total
Carrying amount of inventories & Carrying amount in classification
appropriate to the entity.
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Carrying
amount of Inventories carried at Fair value after deducted cost of sell.
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Amount
of inventories recognised as expenses during the period.
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Any
write down of inventory made during the period.
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Any
reversal of write down of inventory made during the period.
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Circumstance
& event that led to the reversal write down.
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