Overview of Ind AS 2, Inventories

Indian Accounting Standard 2, Inventories

Ind AS 2 prescribes the accounting treatment for inventories, such as, determination of cost and its subsequent recognition as expense, including any write-downs of inventories to net realisable value and reversal of write-downs.

Excluded Inventories (Not dealt under Ind 2)

  • Financial instruments ( covered by Ind AS 32 and Ind AS 109)
  • Biological assets related to agricultural activity
  • Agricultural produce at the point of harvest

An exception from the measurement principle in Ind AS 2 for inventories held by: 

  • producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value in accordance with well-established practices in those industries.
  • commodity broker-traders who measure their inventories at fair value less costs to sell.

Changes in the fair value less costs to sell, or in the net realisable value, of such inventories are recognised in profit or loss in the period of the change .

Inventories are assets:

  • held for sale in ordinary course of business
  • in the process of production of sales in ordinary course of business
  • in the form of material or supplies to be consumed in the production process or rendering of services.

Do not include spare parts, servicing equipment and standby equipment which meet the definition of PPE in Ind AS 16. 

Measurement of Inventory- Lower of Cost and Net Realisable Value

Cost of Inventories includes

  • Cost of purchase;
  • Cost of conversion;
  • Cost to bring inventories to the present location and condition.

Net Realisable Value includes

Estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Cost of purchase

  • Purchase price exclusing trade discounts, rebates, etc.
  • Import duties and taxes to the extent non refundable
  • Transport and handling costs directly attributable
  • Other expenditure directly attributable to the acquisition

Cost of conversion

  • Allocation of fixed production overheads based on normal capacity
  • Variable production overheads assigned to each unit of production on the basis of the actual use of production facilities

Examples of cost exclusions

  • Abnormal wastage
  • Storage costs unless necessary in production process prior to a further production stage
  • Selling and distribution costs
  • Administrative overheads that do not contribute to bringing the inventories to their present location and condition
  • selling costs

Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost.

However, when a decline in the price of materials indicates that the cost of the finished products exceeds net realisable value, the materials are written down to net realisable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value.

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.

Cost Formulas

The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs.

Specific identification of cost means that specific costs are attributed to identified items of inventory.

The cost of inventories, other than those above shall be assigned by using:

  • First-in, first-out (FIFO) or
  • Weighted average cost formula.

An entity shall use the same cost formula for all inventories having a similar nature and use to the entity. For inventories with a different nature or use, different cost formulas may be justified.

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