IAS 2 on Inventories

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)

One big idea per decade

Measuring performance from financial point of view is really just one of a bunch of many performance measurements that collectively determine the real value of the organisation and the keys it needs to hold for the future. (EJ)

Balanced scorecard

Dec 26th 2008
From Economist.com

ROBERT KAPLAN seems to come up with one big idea per decade. In the 1980s it was activity-based costing; in the 1990s it was the balanced scorecard.

The idea was first set out in an article that Kaplan wrote in 1992 for Harvard Business Review, along with David Norton, president of a consulting firm. The article, entitled "The Balanced Scorecard—Measures that Drive Performance", began with the principle that what you measure is what you get. Or, as the great 19th century English physicist Lord Kelvin put it: "If you cannot measure it, you cannot improve it." If you measure only financial performance, then you can hope only for improvement in financial performance. If you take a wider view, and measure things from other perspectives, then (and only then) do you stand a chance of achieving goals other than purely financial ones.

In particular, Kaplan and Norton suggested that companies should consider the following:

• The customer's perspective. How does the customer see the organisation, and what should the organisation do to remain that customer's valued supplier?

• The company's internal perspective. What are the internal processes that the company must improve if it is to achieve its objectives vis-à-vis customers, shareholders and others?

• Innovation and improvement. How can the company continue to improve and to create value in the future? What should it be measuring to make this happen?

The idea of the balanced scorecard was embraced with enthusiasm when it first appeared. Companies were frustrated with traditional measures of performance that related only to the shareholders' point of view. That view was seen as unduly short-termist and too concerned with stockmarket twitches; it prevented boardrooms and managers from considering longer-term opportunities. The balanced scorecard not only broadens the organisation's perception of where it stands today, but it also helps it to identify things that might guarantee its success in the future.

Kaplan and Norton saw the benefits of the balanced scorecard as follows:

• It helps companies to focus on what needs to be done to create a "breakthrough performance".

• It acts as an integrating device for a variety of often disconnected corporate programmes, such as quality, re-engineering, process redesign and customer service.

• It translates strategy into performance measures and targets.

• It helps break down corporate-wide measures so that local managers and employees can see what they need to do to improve organisational effectiveness.

• It provides a comprehensive view that overturns the traditional idea of the organisation as a collection of isolated, independent functions and departments.

Further reading

Kaplan, R.S. and Norton, D.P., "The Balanced Scorecard—Measures that Drive Performance", Harvard Business Review, January–February 1992

Kaplan, R.S. and Norton, D.P., "The Balanced Scorecard: Translating Strategy into Action", Harvard Business School Press, 1996

Kaplan, R.S. and Norton, D.P., "Using the Balanced Scorecard as a Strategic Management System", Harvard Business Review, 1996, reproduced July/August 2007

Niven, P.R., "Balanced Scorecard Step-by-Step: Maximising Performance and Maintaining Results", John Wiley & Sons, 2002; 2nd edn, 2006

No laughter into 2009

'No one will talk of EQ anymore. It will be EVA instead. Thinking outside the box will no longer be celebrated. Ticking the boxes will be.'

According to this article, HRD & CMO will be silently fading into the background while CFO is bound to be more indispensable despite putting up with steerage level of tight "financial leadership" and lingering in noncomfort zone. (EJ)

The year of the CFO

Economist, Nov 19th 2008
From The World in 2009 print edition
By Lucy Kellaway

Corporate life won't be funny

James Sillavan

PREPARE for the year of the finance director. In 2009 the world will find out just how bad corporate balance sheets really are, and companies—most of which escaped the early effects of the credit crunch—will start to find it trickier to raise money. Add to that the upward push in costs and downward slide in demand, and the chief financial officer (CFO) will be called upon to shore up the P&L too.

The implications of his ascendancy will be felt far beyond the figures and will last much longer than it takes to make them look healthy again. There will be a shift in the balance of power in the boardroom, which will affect how companies are managed, what it feels like to work in them, the culture of business and even its language.

For the past decade the prevailing wind in boardrooms has been gentle. Emotional intelligence and innovation have been what counted, and what leaders professed to value. But those ideas are all but finished. No one will talk of EQ ("emotional intelligence quotient") any more. It will be EVA ("economic value added") instead. Thinking outside the box (an over-rated activity at the best of times) will not be celebrated. Ticking boxes will be.

As financial skills are valued more highly, CFOs will make it to the corner office in greater numbers than before. Recession, credit crunch and the increasingly complex nature of global companies will all play directly into the bean counter's hands. Nominations committees will throw their trust behind the guy who has protected the creditworthiness of a company in hard times and won the trust of the market; they will pick him for the top slot rather than poaching an expensive star CEO from outside. This will be bad news for headhunters (who will vainly try to make good the shortfall by meddling in internal succession instead), but also bad news for CEOs' bank balances as top salaries will halt their ever-upward march.

Leadership style at the top will change. Big personalities have been out of fashion at the top for some years; in 2009 they will be more out than ever. However, egalitarianism and empowerment will also be on the way out; management by fiat is going to make a stealthy return.

In the boardrooms, the firm slap of leadership will be felt. "Execution" will no longer be a management fad, it will be a part of daily life. We will hear less of "vision" and much more of "value".

Goodbye "talent", hello "staff"

The biggest loser in the struggle for power will be the human resources director. In the past five years HR has been enjoying the greatest power it has ever had. The "war for talent", which companies have fought tooth and nail, will be over in 2008, neither lost nor won: there will be a ceasefire brought on by lack of funds and exhaustion of the troops. An old truth will be whispered by the brave: most workers are not terribly talented and most of them don't need to be, as most jobs don't require it. In 2009 a more elitist shift will occur: companies will worry about the performance of those at the top of the pyramid, while everyone else will be managed like a commodity. "Talent" will be a word we wave goodbye to. In 2009 the word "staff" will make a comeback, as will "headcount".

In this new world the HR director might just cling on to his title, but his job will be downgraded to personnel and in particular to payroll.

The marketing director will also lose out. He has already been kicked once by the decline of advertising and kicked again as the power of the internet has made his traditional tools useless. In 2009 his budgets will fall further, as will his status. As for the corporate-social-responsibility supremo, he will be told to take a gap year indefinitely.

Thinking outside the box (an over-rated activity at the best of times) will not be celebrated. Ticking boxes will be

The firm financial leadership will be welcome in that it will help companies survive, yet being a corporate foot-soldier in 2009 is not going to be enjoyable. Moaning will be on the rise as inexorably as expenses will be on the decline.

There will be less foreign travel, which will make work more efficient but duller. And there will be no more free champagne in first class—it will be steerage only. Expense-account lunches and subsidised health clubs will be slashed, and stationery cupboards will be thinly stocked.

One blessed thing will be cut: weekend offsite meetings in luxury hotels. Instead, if managers feel the need to bond at all it will be done more quickly over a cup of tea from the vending machine. There will be no more laughter workshops led by an outsourced facilitator—but then in the new world of 2009 there is not going to be a lot to laugh about.

Lucy Kellaway is a columnist at the Financial Times and author of "The Answers: All the Office Questions You Never Dared to Ask"