CAP CLASSES 9846791598

INVENTORIES AND BIOLOGICAL ASSETS

IAS 2 Inventories
Definition of Inventories:
Assets that are:
• Held for sale in the ordinary course of business;
• In the process of production for such sale; or
• In the form of materials or supplies to be consumed in the production
process or in the rendering of services. (IAS 2: para. 6)

Examples of inventories include:

1) Raw materials (awaiting use in the production process)

2) Work in progress (WIP)
3) Finished goods
4) Goods purchased and held for resale

Measurement

Inventories shall be measured at the lower of cost and net realisable value (NRV)
(IAS 2: para. 9).

Net Realizable Value

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.

As noted above, where the net realisable value of inventories is less than cost the
inventories in the financial statements should be measured at the lower of cost and
net realisable value.

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NRV less than cost

The net realisable value of inventories may be less than cost due to:

 Errors in production or purchasing

 An increase in costs or a fall in selling price
 A physical deterioration of inventories
 A decision being made as part of a company's marketing strategy to
manufacture and sell products at a loss
 Obsolescence of products

Cost

Cost is the cost of bringing items of inventory to their present location and
condition (including cost of purchase and cost of conversion)

Components of cost

The cost of inventories comprises all of the costs of purchase, costs of conversion
and other costs incurred in bringing the inventories to their present location and
condition.

Costs of purchase Costs of conversion Other costs

• Purchase price, less any • Costs directly related to Costs related to
trade discounts or units of production, for bringing the
rebates example: - inventories to their
• Import duties and any o Direct present location and
other taxes, for materials condition which are
example, non- o Direct labour not already included
refundable sales tax o Sub-contracted work in costs of purchase.
• Directly attributable • Systematic allocation of For example, non-
costs of acquiring the fixed and variable production overheads
inventory including production overheads* such as designing a

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delivery and handling incurred in converting product for a specific

costs materials into finished customer.
goods

Note:

1) Fixed production overheads relate to indirect costs such as the cost of factory
management and administration which remain relatively constant regardless of
the volume of production. These should be allocated to units of production
based on a normal level of activity.
2) Variable production overheads include indirect materials and labour and vary
with the volume of production.

Inventory Valuation Methods:

1) IAS 2 deals with three methods of arriving at cost:

 Actual unit cost
 First in, first out (FIFO)
 Weighted average cost (AVCO)
2) Where items of inventory are not ordinarily interchangeable (e.g. used cars), IAS
2 requires the actual unit cost valuation method to be used. Such items should
be shown at their actual individual costs.
3) Where items are ordinarily interchangeable (e.g. tins of beans), the entity must
choose between two cost formulae: the FIFO Method and AVCO Method.
4) The same method of arriving at cost should be used for all inventories having
similar nature and use to the entity. For inventories with a different nature or use,
different cost methods may be justified.

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Disclosure

The financial statements should disclose the following:

1) The accounting policies adopted in measuring inventories, including the cost

formula used;
2) The total carrying amount of inventories and the carrying amount in
classifications appropriate to the entity;
3) The carrying amount of inventories carried at fair value less costs to sell;
4) The amount of inventories recognised as an expense during the period;
5) The amount of any write-down of inventories recognised as an expense in the
period;
6) The amount of any reversal of any write-down that is recognised as a reduction
in the amount of inventories recognised as expense in the period;
7) The circumstances or events that led to the reversal of a write-down of
inventories; and
8) The carrying amount of inventories pledged as security for liabilities.

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Problems and Solutions:

Problem No. 1

Caminas Co has the following products in inventory at the year-end.

Product Quantity Cost Selling price Selling cost
A 1,000 $40 $55 $8
B 2,500 $15 $25 $4
C 800 $23 $27 $5
At what amount should total inventory be stated in the statement of financial
position?
A. $95,900
B. $95,100
C. $103,100
D. $105,100
Solution:
B. $95,100
Product $
A 1,000  40 40,000
B 2,500  15 37,500
C 800  22 17,600
95,100
Problem No. 2
In which of the following situations is the net realisable value of an item of inventory
likely to be lower than its cost?
A. The production cost of the item has been falling
B. The selling price of the item has been rising 
C. The item is becoming obsolete
D. Demand for the item is increasing
Solution:
C -The item is becoming obsolete

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As the item becomes obsolete, we can expect its market price to fall – and
eventually fall below cost. The other options would all maintain or improve the net
realisable value of the item.

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IAS 41 AGRICULTURE

Definitions:

1) Biological assets: Living animals or plants.

2) Biological transformation: The processes of growth, degeneration, production and
procreation that cause qualitative and quantitative changes in a biological asset.
3) Agricultural produce: The harvested product of an entity’s biological assets. (IAS 41:
para. 5)

The table below gives examples of each

Biological assets Agricultural produce Products resulting from

processing after harvest
(Included in IAS 41, expect (Included in IAS 41 at the
bearer plants) point of harvest, treated as (Outside the scope of IAS 41)
inventory after that point)
 Sheep  Wool  Yarn, Carpet
 Tress in a timber  Felled trees  Logs, lumber
plantation  Milk  Cheese
 Dairy cattle  Carcass  Sausages, cured hams
 Pigs  Harvested cotton  Thread, clothing
 Cotton plants  Harvested cane  Sugar
 Sugarcane  Picked leaves  Cured tobacco
 Tobacco plants  Picked grapes  Tea
 Tea bushes  Picked fruit  Wine
 Grape vines  Harvested latex  Processed fruit
 Fruit trees  Palm oil
 Oil palms  Rubber products

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Recognition

As with other non-financial assets under the Conceptual Framework, a biological

asset or agricultural produce is recognised when:

a) The entity controls the asset as a result of past events;

b) It is probable that future economic benefits associated with the asset will flow
to the entity; and
c) The fair value or cost of the asset can be measured reliably. (IAS 41: para. 10)

Measurement

1) Biological assets are measured both on initial recognition and at the end of
each reporting period at fair value less costs to sell.
2) Agricultural produce at the point of harvest is also measured at fair value less
costs to sell.
3) The fair value less costs to sell of agricultural produce harvested becomes its cost
under IAS 2. After harvest, the agricultural produce is measured at the lower of
cost and net realisable value in accordance with IAS 2. Fair value is the price that
would be received to sell the asset (IFRS 13 Fair Value Measurement).
4) Costs to sell are incremental costs directly attributable to disposal of the asset,
eg commissions to brokers and transfer taxes.
5) Changes in fair value less costs to sell are recognised in profit or loss.
6) Where fair value of biological assets cannot be measured reliably, they are
measured at cost less accumulated depreciation and impairment losses.

Presentation

Biological assets are presented as non-current assets.

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Problems and Solution:

Problem No. 3

At what amount is a biological asset measured on initial recognition in accordance

with IAS 41 Agriculture?

A. Production cost
B. Fair value
C. Cost less estimated costs to sell
D. Fair value less estimated costs to sell

Solution:

D- Fair value less estimated costs to sell

IAS 41 Agriculture requires biological assets to be measured on initial recognition at

fair value less estimated costs to sell.

Problem No. 4

Which of the following is NOT the outcome of a biological transformation according

to IAS 41?

A. Growth
B. Harvest
C. Procreation
D. Degeneration

Solution:

B - Harvest

Harvest is an intervention, not a biological process. Growth, procreation and

degeneration are natural biological processes.

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Problem No. 5

How is a gain or loss arising on a biological asset recognised in accordance with IAS
41?

A. Included in profit or loss for the year 

B. Adjusted in retained earnings
C. Shown under 'other comprehensive income'
D. Deferred and recognised over the life of the biological asset

Solution:

A -Included in profit or loss for the year

A gain or loss on a biological asset is included in profit or loss for the year.

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