Ind AS 2
INVENTORIES
Table of Contents
1. Introduction 2
2. Definitions 2
3. Measurement 3
4. Recognition as Expense 6
5. Disclosures 7
6. Ind AS 2 vs AS 2 7
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1. Introduction
1.1 Objective
• To prescribe accounting treatment of inventories.
• Determination of cost of inventory.
• Subsequent recognition as an expense.
• Provides guidelines on cost formulas.
1.2 Scope
Standard applies to all inventories except
(a) Financial Instruments Ind AS 32 & 109
(b) Biological assets related to agricultural activity Ind AS 41
and agricultural produce at the point of harvest
(c) Measurement of inventories held by Recognition criteria
- Producers of agricultural & forest applies
products, minerals etc to the extent
meausred at NRV in line with industry
practice
- Commodity broker-traders who measure
inventories at FV less cost to sell
2. Definitions
2.1 Inventories
Inventories are
assets
Held for sale in the In the process of In the form of materials or
supplies to be consumed in
ordinary course of production for such the production process or
business sale rendering of services
Raw material and
Finished Goods Work in Progress
supplies
2.2 Net Realisable Value (NRV)
NRV is the estimated selling price in the ordinary course of business less the estimated
cost of completion and the estimated costs necessary to make the sale.
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2.3 Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date.
3. Measurement
Golden Rule - Inventories are measured at lower of cost and net realisable
value.
3.1 Cost of Inventories
PARTICULARS AMOUNT
Cost of Purchases
Purchase Price XXX
(+) Import duties & other taxes XXX
(+)Transport & handling charges XXX
(+) Other Costs to bring the inventory to present location XXX
& condition XXX
(-)Trade discounts, rebates & other similar items (XXX) XXX
Cost of Conversion
Direct material XXX
(+) Direct labour XXX
(+) Other direct costs XXX
(+) Overheads (Fixed* as well as variable overheads) XXX XXX
Other Costs
Costs incurred to bring the inventories to their present
location & condition XXX
(+) Borrowing Cost under Ind AS 23 XXX XXX
Cost of Inventory XXX
3.2 Overhead
Fixed overhead is allocated based on predetermined overhead recovery rate (ORR)
computed as below.
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑖𝑥𝑒𝑑 𝑂𝐻
𝑃𝑟𝑒 𝐷𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑒𝑑 𝑂𝑅𝑅 =
𝑃𝑙𝑎𝑛𝑛𝑒𝑑 𝑜𝑟 𝑁𝑜𝑟𝑚𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛
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Actual Production
> Planned /Normal <= Planned/Normal
Production Production
Recompute ORR Predetermined ORR
3.3 Net Realisable Value
Estimated Selling Price XXX
(-) Estimated costs to complete (XXX)
(-) Estimated Costs to Sell (XXX)
Net Realisable Value XXX
• Estimates of NRV should be based on most reliable evidence available.
• Events occuring after balance sheet should be considered to the extent
they provide additional evidence of events existing on balance sheet date.
• Price reductions in future should not be considered to determine NRV.
• If inventory is held for a firm contract to sell, the contracted price can be
an evidence of NRV.
Write down of inventories should be done on an item to item basis and not
on global basis.
3.4 Joint Products & By Products
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Joint Products – Two or more products produced from a single process using
common inputs. Each product has significant value. Example – Petrol, Diesel, Gas
produced on refining crude.
Joint costs are allocated on the basis of relative sales value / NRV at split off point.
By Products – These are low value produces – generally considered as scrap.
NRV of by products is reduced from joint costs if the by products are immaterial. If
the by products are material, consider as Joint Products.
3.5 Cost measurement techniques
Retail Method Standard Cost Method
Cost of Inventory = Standard cost is set considering standard
Expected Sales Value usage of
(-) Normal Gross Profit Margin - Material
- Labour
- Overhead
- Capacity utilisation
3.6 Cost Formula
Valuation
Methods
Inventory Inventory
Ordinarily Not Ordinarily
Interchangeable Interchangeable
Specific Non
Historical
Identification Historical
Cost
of Cost Cost
Used in
Weighted Standard
Projects, Job FIFO Retail Method
Average Cost
Work
An entity shall use same cost formula for all inventories having a similar nature and
use to the entity. For inventories with a different use , different cost formula can be
used.
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3.6.1 FIFO Method
- Assumption of cost flow : Inventory purchased first is sold first.
- Goods in Inventory are valued using the latest rates
3.6.2 Weighted Average Rate
- Cost is determined using a weighted average rate of goods
received.
- The weighted average can be a periodic weighted average or a
moving weighted average.
3.7 Raw Material Valuation
Raw Material
Valuation
Selling price > Cost Selling Price < Cost
Value at cost
Decline in price
of materials
Written down Valued at
to NRV replacement cost
4. Recognition as Expense
Expense charged to P&L
Carrying amount of inventories sold XXX
(+) Loss due to write down to NRV XXX)
(-) Reversals of write down (XXX)
Expense XXX
The cost of some inventories may be allocated to other asset accounts. For example,
inventory used as a component of self-constructed property, plant or equipment.
Inventories allocated to another asset are recognised as an expense during the useful life
of that asset through charging of depreciation on that asset (Ind AS 16)
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5. Disclosures
• Accounting policies including cost formula used.
• Analysis of carrying amount of inventory & carrying amount in
classifications appropriate to the entity
• Carrying amount of inventories carried at fair value less cost to sell
• Carrying amount of inventories pledged as security
• Amounts recognised in profit or loss
o Recognised as expense
o Write down of inventory
o Reversals of write down
6. Ind AS 2 vs AS 2
There are no significant differences between IndAS 2 and AS 2. Overview of key
differences are given below -
IND AS 2 AS 2
Deals with subsequent recognition of Does not provide for the same. It is
cost/carrying amount of inventories as implied.
an expense
Explains inventories of service Does not contain such explanations
providers
Does not contain specific explanation AS 2 explains inventory does not
in respect of spares include spare parts, servicing
equipment & standby equipment
which meets the definition of AS 10
PPE
Not applicable to inventories held by No such exclusion
Broker-traders
Defines fair value & explains distinction Does not contain definition of fair
between fair value & NRV value & such explanation
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Provides guidance on subsequent Does not deal with such reversals
realisation of NRV. Also deals with
reversals of written down values
Agricultural produce are excluded only Such inventories are totally excluded
from the scope of measurement under from the scope of the standard
this standard
Requires use of consistent cost Specifically states that cost formulas
formulas for all inventories having used should provide fairest possible
similar nature. approximation of inventories.
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