IAS 2 Inventories

Definitions
• Inventories are assets
-held for sale in the ordinary course of business
-in the process of production for such sale
-in the form of materials or supplies to be consumed in the production process or in the rendering of
services.
• Net Realisable value
- Estimated selling price
- in the ordinary course of business
- less estimated cost of completion
- less estimated costs necessary to make the sale
- Thus an entity- specific value
• Fair Value
- The price that would be received to sell an asset
- or would be paid to transfer a liability
- in an orderly transaction between market participants at the measurements date
- Thus a market specific value
Cost price
• Cost of purchase
- Purchase price, import duties, transport and handling
- Taxes not subsequently recoverable
- other cost directly attributable to the acquisition of finished goods materials and services
- trade discounts rebates and other similar items are deducted
• Cost of conversion
- Direct labour, production, overheads, indirect materials and labour
- fixed overheads based on normal capacity
- unallocated overheads are recognized as expenses
• Other costs
- Incurred in bringing inventories to present location and condition

General
• If goods are returned, remember that one is not able to recover the import duties, shipping costs etc to
bring the inventories to its current condition- thus will only credit cost of the inventories with the
amount actually paid to the supplier to whom the goods are returned

Abnormal expenditures
Abnormal expenditure, and different systems
• In perpetual- abnormal expenditure goes directly to cost of sales, not in finished goods closing balance-
thus expensed to cost of sales immediately when incurred
• In periodic- manufacturing account closes to cost of sales, and then inventory balance (which would
exclude the abnormal cost) is calculated and credited to cost of sales, and then the remaining amount
in cost of sales would be the abnormal costs
Under allocation of overheads
• In perpetual and periodic the under allocation goes to Cost of Sales
 Over allocation
• The actual level of production may be used if it approximates normal capacity. (thus there may only be
an over- allocation if the actual production doesn’t exceed expected production materially)
• In periods of abnormally high production, the amount of fixed overhead allocated to each unit of
production is decreased so that inventories are not measured above cost. (Thus have to change the
allocation rate; the actual expenditure is then divided by the actual production and then multiplied by
actual production)

NRV
• Reversal of impairment loss- only reverse for inventories still on hand, not already sold
• If contract is agreed to sell inventories at less than cost price in the future- only write down to NRV those
inventories that apply
Raw materials
• Must first calculate the NRV of finished goods, and the write down to NRV is then limited to the write
down for the finished goods, irrespective of the selling price of the raw materials, as it will not be sold in
the ordinary course of business
• Thus: If there is a write down to NRV of finished goods, need to apply that write down to raw materials as
well that will be turned onto finished goods (If raw materials are also lower than cost)
• ****Calculation: How many finished goods units will be manufactured using the raw materials
multiplied by the write down to NRV per finished good unit
• Reversal of write down- if the NRV is above the cost of the finished again, reversal is limited to the lower
of the new replacement cost of the raw materials, and the original write down per unit
• *****The write down to NRV is limited to the Replacement cost of the raw materials
By Products
• Value at NRV, and split in the note

Groups
Groups-Intragroup inventory sales****
R100 cost price for P, Sold to S for R 110
If all inventories are sold (always the intragroup journal, does not affect group profit)
Dt Sales (intragroup sales of parent- amount of cost of sales of the subsidiary) 110

Ct COS- Subsidiary 110

DT COS (With the gross profit of P of inventories that have not been sold)

CT Inventories
If all inventory not sold
DT Sales (Sales of Parent)- intragroup journal always 110

COS- S (Sales) 110

DT COS (With Gross profit of P) 10

CT Inventories (Gross profit) 10

DT RE 10

Ct COS (Opening inventories is less, thus COS decreases- previous years closing inventories
becomes this year’s opening inventories) 10

DT Sales 220

CT COS 220

COS (Gross profit of P) 20

Inventories (Closing inventories) 20

NCI
If parent sells to subsidiary- no effect

If S sells to P: Take into account the journal that decreases the gross profit of the intra group sales,
i.e.

DT COS (With Gross profit of P) 10

CT Inventories (Gross profit) 10