International Accounting Standard on Inventories (IAS 2)
The following is a brief summary of IAS 2 on Inventories.
Definition
Inventories include:
1. FG = Finished Goods (assets held for sale in the ordinary course of business)
2. WIP = Work in Process (assets in the production process for sale in ordinary course of business)
3. DM = Materials & supplies consumed in production (raw materials)
Valuation
Inventories are valued at Lower of Cost and NRV (Net Realisable Value).
NRV = Net Realisable Value = the Estimated selling price in normal course of business less the Estimated cost to complete and make the sale.
FV = Fair Value = The amount at which an asset could be exchanged or liability settled between knowledgable willing parties in an arm's length transaction.
Cost of Inventories = Purchase cost + Conversion cost + Other costs incurred in bringing them to their present location & condition.
* Purchase Cost = PP (purchase price) + import duties + transport + handling cost for acquisition of the goods.
* Conversion Cost = Direct Labor + Overhead (variable + fixed)
* Other costs = Cost of designing products, etc
Excluded Costs from Inventory valuation:
- Abnormal amounts of wasted material, labor, other product costs.
- Storage costs
- Admin OH unrelated to production
- Selling costs
- Forex differences from acquisition of the inventories
- Interest cost
These costs should be expensed during the period.
Measurement
Inventory cost should be measured using one of these two methods:
* FIFO Method, or
* WAC (Weighted Average Cost) Method
Source: IAS 2 (www.iasplus.com/standard/ias02.htm)