Ind AS-2

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• Ind AS-2
• INVENTORIES
• by
• CA, D.S.RAWAT
• Partner, BANSAL Co.

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Scope

• Inventories are assets
• held for sale in 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

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Scope

• Does not apply
• agricultural produce which are measured at fair
  value less cost to sell
• commodity brokers and dealers who measures their
  inventories at fair value less costs to sell
  through profit and loss account

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Measurement of inventories

• Inventories shall be measured at the lower of
  cost and net realizable value

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Costs of inventories

• Comprise of
• Purchase cost
• Cost of conversion
• Other cost incurred in bringing the inventories
  to their present location and condition

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Costs excluded from inventories

• Abnormal cost
• Storage cost
• Administrative overhead
• Selling cost

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Costs of purchase

• Comprise the purchase price, import duties and
  other taxes (other than those subsequently
  recoverable from tax authority), other cost
  directly attributable less trade discounts and
  rebates
• In deferred payment system element of financial
  cost excluded.

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Costs of conversion

• Costs directly related to the units of
  production, such as direct labor cost and
  systematic allocation of fixed and variable
  production overheads

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Allocation of fixed production overheads

• Allocation based on normal capacity of the
  production facility

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Joint products and by-products

• When joint products are produced Main product
  and by-product
• When conversion of each product not identifiable
  rational and consistent method be followed

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Techniques for measurement of cost

• Techniques like, standard cost method or retail
  method may be used for convenience if the results
  approximate cost.

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Cost formulas

• Items not ordinarily interchangeable or goods or
  services produced for specific projects
  specific identification of cost.
• Other than above FIFO or weighted average cost
  method

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Net realizable value

• Expected selling price less cost to sell

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Recognition as an expense

• 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.
• Inventories allocated to another asset are
  recognised as an expense during the useful life
  of that asset.

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Disclosure

• Accounting policies measurement and cost
  formula
• Classification and carrying amount of the
  inventories
• Inventories carried at fair value less cost to
  sell
• Inventories recognised as an expense
• Any reversal of write-down
• Circumstances led to reversal or write-down
• Carrying amount of inventories pledged.

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Case Study -1

• The production of whisky involves the distilling
  of aged whisky in a cask prior to bottling. Can
  storage cost be included in the cost of
  inventory?
• Answer Capitalization of storage costs is
  allowed only if the storage is necessary in the
  production process prior to further production
  stage. Therefore, in this situation, the storage
  cost the entity incurs during the distilling
  process should be capitalized, as aging is
  integral to making the finished product saleable.

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Case Study -2

• A company supplies car parts to a major
  manufacturer. At the year end it had inventories
  of parts and carrying value was Rs. 10 lakhs.
  However, after the year end the manufacturer
  changed the models of the cars and as a result
  the inventories became obsolete (the part is not
  interchangeable between models). Should the
  company provide against the inventories at the
  year end?

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Case Study -2

• Answer Ind AS-10, Events after the balance
  sheet date, requires an adjustment to amounts
  recognised at the balance sheet date for the
  events occurred after the balance sheet date.
• Ind AS-2 states, Estimates of net realizable
  value are based on the most reliable evidence
  available at the time the estimates are made , of
  the amount the inventories are expected to
  realize.
• These estimates take into consideration
  fluctuations of price or cost directly relating
  to events occurring after the end of the period
  to the extent that such events confirm conditions
  existing at the end of the period

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Case Study -2

• This rises the question of whether the condition
  existed at the year end. It might be argued that
  the change of model by manufacturer is a
  condition that did not exist at the year end and,
  therefore, the loss is post balance sheet event.
  However, it is likely that the manufacturer would
  have been considering the change over a long
  period (including the period prior to the year
  end) even if it did not announce the change until
  after the year end. In addition, the high
  inventory levels may have indicated slow demand
  from the manufacturer. This confirmed by the post
  balance sheet announcement confirming the
  over-supply at the year end.

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Case Study -2

• Therefore, the condition (the likelihood that the
  models would change and the resultant potential
  loss) is likely to have existed at the year end
  and, therefore, the post balance sheet
  confirmation of the change of model and the
  resultant loss should be reflected in the
  carrying value of the inventories at the year end.

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Case Study -3

• A car distributor values its items of inventory
  at the year end. Rebates are only received from
  the car manufacturers one a year and are only
  known after the year end, but relate to purchases
  in the current period. Should the rebates be
  taken through the income statement is a deduction
  in the cost of sales without allocation to the
  items in inventory at the balance sheet date or
  should a proportion of the rebates be allocated
  to the inventory items at the year end?

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Case Study -3

• Ans- A proportion of the rebates should be
  allocated to inventory items at the year end. For
  example, if purchases during he year are 100 and
  there is inventory with a cost of 10 at the year
  end , 10 of the rebate should be applied to the
  inventory items at the year end and 90 should be
  taken through the income statement s a deduction
  in the cost of sales.

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Case Study -3

• The reasoning is that the rebates cannot be
  allocated to particular items in the year,
  therefore, they, should be spread over all the
  items purchased during the year, sold or unsold.

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• THANK
• YOU
• CA, D.S.RAWAT
• Partner, BANSAL Co.