Inventories PAS 2

Scope
All inventories except:
Construction contracts (PAS 11)
Financial instruments (PFRS 9/PAS 39)
Biological assets (PAS 41)

Does NOT APPLY to measurement of inventories held by:

  • Producers of agricultural and forest products measured at NRV.
  • Minerals and mineral products measured at NRV.
  • Commodity brokers who measure inventory at fair value less costs to sell.


Definition
Inventories are assets:
  • Held for sale in 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.



Inventories are measured at the lower of Cost
                                                                  and net realizable value (NRV)

Cost
Includes

  • Any costs of purchase, including non-recoverable taxes, transport and handling.
  • Costs are net of trade volume rebates.
  • Costs of conversion.
  • Other costs to bring inventory into its present condition and location.

Excludes

  • Abnormal waste.
  • Storage costs. (except for WIP Inv.)
  • Admin overheads not related to production.
  • Selling costs.
  • Interest cost (where settlement is deferred).
- IAS 23 identifies RARE circumstances where borrowing costs can be included.


Cost Formulas (Inventory Valuation)

  • For non-interchangeable items – SPECIFIC IDENTIFICATION.
  • For inter changeable items  – FIFO, or WEIGHTED AVERAGE COST.
  • Use of LIFO is prohibited.


Cost Measurement Techniques:
Standard Cost Method

  • Takes into account normal levels of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revised in the light of current conditions.


Retail Method

  • Often used in the retail industry for measuring inventories of large numbers of rapidly changing items with similar margins for which it is impracticable to use other costing methods. The cost of the inventory is determined by reducing the sales value of the inventory by the appropriate percentage gross margin.


Net Realizable Value

  • NRV is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated selling costs


Recognition of Expenses

  • Carrying amount of inventories sold during the period –COGS.
  • Write down to NRV or Obsolescence as expense in the period.
  • Write down reversal set off against this expense.


Disclosures

  • Accounting policies for measuring inventories, including the cost formula
  • The total carrying amount of inventories, and the carrying amount in classifications appropriate to the entity (eg. raw materials, WIP, finished goods)
  • Carrying amounts of inventories carried at FV less costs to sell
  • Amounts of inventories recognised as an expense during the period
  • Amount of any write-down of inventories recognised as an expense in the period
  • Amount of any reversal of a write-down to NRV, and the circumstances that led to such a reversal

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Property Plant & Equipment

Recognition and Measurement
Recognise when it is probable that:

  • The future economic benefits associated with the asset will flow to the entity, and
  • The cost of the asset can be reliably measured.




Measurement

  • Initially recorded at cost.
  • Subsequent costs are only recognised if costs can be reliably measured and these will lead to additional economic benefits flowing to the entity.


Cost Compromises

  • Purchase price plus import duties and taxes.
  • Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in a manner intended by management.
  • The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.


Subsequent Measurement
Cost Model
Revaluation Model

>Cost Model
The asset is carried at cost less accumulated depreciation and impairment losses.

>Revaluation Model
The asset is carried at a revalued amount, being its fair value at the date of the revaluation, less subsequent depreciation, provided that fair value can be measured reliably.


  • Revaluations should be carried out regularly (the carrying amount of an asset should not differ materially from its fair value at the reporting date – either higher or lower).
  • Entire class of assets to which that asset belongs should be revalued.
  • Revalued assets are depreciated the same way as under the cost model.
  • An increase in value is credited to other comprehensive income under the heading “revaluation surplus” unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in this case the increase in value is recognised in profit or loss.




Depreciation

  • Depreciable amount should be allocated on a systematic basis over the asset’s useful life.
  • Residual value, the useful life and the depreciation method of an asset should be reviewed annually at reporting date.
  • Changes in residual value, depreciation method and useful life are changes in estimates are accounted for prospectively in accordance with IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors.
  • Depreciation is charged to profit or loss, unless it is included in the carrying amount of another asset.
  • Depreciation commences when the asset is available for use.



Component Accounting

  • Significant parts/components should be depreciated over their estimated useful life.
  • Costs of replacing parts should be capitalised.
  • Continued operation of an item of PPE may require regular major inspections for faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognised in the carrying amount of the item of PPE as a replacement if the recognition criteria are satisfied.


Disposals

  • Remove the asset from the Statement of Financial Position on disposal/when withdrawn from use and no future economic benefits are expected from its disposal.
  • Gain or loss on disposal is the difference between the proceeds and the carrying amount and is recognised in profit or loss.
  • When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings. The transfer to retained earnings is not made through profit or loss.


Disclosures
For each class of property, plant and equipment:

  • Measurement basis used to determine carrying amount
  • Depreciation methods used
  • Useful lives or depreciation rates
  • Gross carrying amount and accumulated depreciation and impairment losses at beginning and end of period
  • Reconciliation of carrying amount at beginning and end of period showing:
  1. – additions
  2. – assets classified as held for sale
  3. – acquisitions through business combinations
  4. – revaluation increases or decreases
  5. – impairment losses
  6. – depreciation
  7. – net exchange differences on translation of financial statements


The following information should also be disclosed:

  • Restrictions on title
  • Expenditures capitalised in respect of PPE during construction
  • Contractual commitments for the acquisition of PPE
  • Compensation from third parties for any PPE that was impaired, lost or given up that is included in the P&L



For PPE stated as revalued amount the following disclosures are required:

  • Effective date of revaluation
  • Whether an independent valuer was involved
  • Methods and significant assumptions employed in estimating fair values
  • How fair values were determined
  • For each class of revalued PPE, the carrying amount that would have been recognised had the assets been carried under the cost model
  • The revaluation surplus, its change for the period and any restrictions on the distribution of the balance to the shareholders.
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Closing The Books

You close the books for the revenue and expense accounts and begin the entire cycle again with zero balances in those accounts.

Financial Statements

You prepare the balance sheet and income statement using the corrected account balances.

Adjusting Journal Entries

You post any corrections needed to the affected accounts once your trial balance shows the accounts will be balanced once the adjustments needed are made to the accounts. You don’t need to make adjusting entries until the trial balance process is completed and all needed corrections and adjustments have been identified.

Worksheet

Unfortunately, many times your first calculation of the trial balance shows that the books aren’t in balance. If that’s the case, you look for errors and make corrections called adjustments, which are tracked on a worksheet.

Adjustments are also made to account for the depreciation of assets and to adjust for one-time payments (such as insurance) that should be allocated on a monthly basis to more accurately match monthly expenses with monthly revenues. After you make and record adjustments, you take another trial balance to be sure the accounts are in balance.

Trial Balance


At the end of the accounting period (which may be a month, quarter, or year depending on a business’s practices), you calculate a trial balance.

Posting


The transactions are posted to the account that it impacts. These accounts are part of the General Ledger, where you can find a summary of all the business’s accounts.
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Journal Entries


The transaction is listed in the appropriate journal, maintaining the journal’s chronological order of transactions. The journal is also known as the “book of original entry” and is the first place a transaction is listed.

Transaction


Financial transactions start the process. Transactions can include the sale or return of a product, the purchase of supplies for business activities, or any other financial activity that involves the exchange of the company’s assets, the establishment or payoff of a debt, or the deposit from or payout of money to the company’s owners.

Impairment Loss


Scope
All assets, except: inventories, construction contracts, deferred tax assets, employee benefits, financial assets under IAS 39,
investment property, biological assets, insurance contract assets under IFRS 4, and held for sale assets under IFRS 5.

Assets to be reviewed
Individual assets
Cash generating units
 (‘CGU’)
The smallest identifiable group of assets that generates cash flows that are independent of the cash inflows from other assets or group of assets.

Impairment: Carrying Amount > Recoverable Amount

Recoverable amount of an asset or cash generating unit is the HIGHER of its fair value less costs to sell and its value in use.

>FAIR VALUE LESS COSTS TO SELL
Amount obtainable in an arm’s length
transaction less costs of disposal.
Fair Value

  • Binding sale agreement
  • Market price in an active market Costs to sell
  • Incremental costs attributable to the disposal of an asset


>VALUE IN USE (VIU)
Represents the discounted future net cash flows from
the continuing use and ultimate disposal of the asset.
Cash Flows:

  • From continuing use and disposal
  • Based on the asset in its current form
  • Excluding financing activities
  • Pre-tax Discount Rate
  • Pre-tax Either adjust future cash flows or adjust the discount rate for the elements that should be reflected in the calculation of value in use


When to Impair?
Indicator of impairment
Annually

Indicators of Impairment
Internal
External

Internal Indicators

  1. Evidence of obsolescence or physical damage
  2. Discontinuance, disposal of restructuring plans
  3. Declining asset performance


External Indicators

  1. Significant decline in market value
  2. Changes in technological, market, economic or legal environment
  3. Changes in interest rates
  4. Low market capitalisation



Annual Impairment Tests
Compulsory for:

  • Intangible assets with indefinite useful life
  • Intangible assets not yet available for use
  • CGU to which goodwill has been allocated


Allocation of impairment (CGU)
Goodwill first
Pro-rata other assets but not below:
(i) FV less costs to sell
(ii) VIU
(iii) Zero

Impairment loss should be charged to P&L unless it relates to a revalued asset, in which case the impairment loss should be offset against the revaluation surplus on the same asset.

When to reverse Impairment?
Internal Indicators
External indicators

Internal Indicators

  1. Changes in way asset is used or expected to be used
  2. Evidence from internal reporting indicates that economic performance of the asset will be better than expected


External Indicators

  1. Significant increase in market value
  2. Changes in technological, market, economic or legal environment
  3. Changes in interest rates


Individual Asset – recognise in P&L unless asset is carried at revalued amount
CGU – Allocated to assets of CGU on a pro-rata basis
Goodwill – previous impairment losses can never be reversed

Disclosures
An entity should disclose the following for each class of asset:
Impairment losses and reversals recognised in P&L for period
Impairment losses on revalued assets, and reversals, recognised in OCI for the period.

For each reportable segment, disclose:
Events or circumstances that led to the recognition or reversal
Amount of the impairment loss
For an individual asset – it’s nature and reporting segment
whether recoverable amount is FV less costs to sell or VIU
basis to determine VIU (if applicable)
Discount rate used for VIU (if applicable)


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