Inventory accounting ifrs ias 2. Inventories
9 Inventories should be measured at the lower of cost or net realizable value.
Cost of inventory
10 The cost of inventory shall include all acquisition costs, processing costs and other costs incurred to maintain the current location and condition of the inventory.
Acquisition costs
11 Inventory acquisition costs include purchase price, import duties and other taxes (excluding those that are subsequently reimbursed to the entity tax authorities), as well as costs of transportation, handling and other costs directly related to the acquisition finished products, materials and services. Trade discounts, rebates and other similar items are deductible in determining acquisition costs.
Processing costs
12 Inventory processing costs include costs, such as direct labor costs, that are directly related to the production of a product. They also include systematically allocated fixed and variable production overheads arising from the conversion of raw materials into finished goods. Fixed production overhead costs are indirect production costs that remain relatively constant regardless of production volume, such as depreciation and maintenance of production buildings, equipment and right-of-use assets that are used in the production process, and management and administrative costs associated with production. Variable production overheads are indirect production costs that are directly or almost directly related to the volume of production, such as indirect costs of raw materials or indirect costs of labor.
13 The allocation of fixed production overheads to processing costs is based on normal capacity utilization. Normal utilization is the amount of production that is expected to be achieved based on averages over a number of periods or seasons of normal operation, taking into account productivity losses due to scheduled maintenance. Actual production can only be used if it approximates normal production. The amount of fixed overheads attributed to each product does not increase as a result of low production or downtime. Unallocated overheads are recognized as an expense in the period in which they are incurred. During periods of unusually high levels of production, the amount of fixed overheads attributed to each unit of output is reduced so that inventory is not valued above cost. Variable production overheads are allocated per unit of production based on actual capacity utilization.
14 More than one product can be produced at the same time in a manufacturing process. This occurs, for example, in the production of co-products or a main product and a by-product. If the processing costs for each product cannot be identified separately, they are allocated to the products on a prorated and consistent basis. For example, distribution can be based on the relative sales value of each product, either at a stage in the manufacturing process when the products become individually identifiable, or at the end of production. Most by-products are inherently non-essential. In such cases, they are often measured at their net realizable value, which is deducted from the cost of the main product. As a consequence, the book value of the main product does not differ significantly from its cost price.
Other costs
15 Other costs are included in the cost of inventory only to the extent that they are incurred to support the current location and condition of the inventory. For example, it might be appropriate to include non-manufacturing overheads or customer-specific product development costs in the cost of inventory.
16 Examples of costs not included in the cost of inventories and recognized as an expense in the period in which they are incurred are:
(a) excess loss of raw materials, labor expended or other production costs;(b) storage costs, unless they are required in the production process to proceed to the next stage of production;
(c) administrative overheads that do not help maintain the current location and status of stocks; and
(d) costs of sale.
18 An entity may acquire inventories on a deferred basis. If the arrangement actually contains a financing element, the difference between the purchase price under the ordinary trade credit terms and the amount paid is recognized as interest expense over the financing period.
Service Provider Inventory Cost
19 Deleted.
Cost of harvested agricultural products derived from biological assets
23 The cost of items of inventories that are not normally fungible, and of goods or services produced and allocated for specific projects, shall be determined at the cost of each unit.
24 The cost per unit method assumes that the costs incurred are attributed to specified items of inventory. This treatment is appropriate for project-specific units, whether purchased or produced. However, calculating the cost of each unit is inappropriate in cases where there are a large number of inventory items that are usually interchangeable. In such cases, a method of selecting those items that remain in inventory could be used to obtain a predetermined effect on profit or loss.
25 The cost of inventories, other than those dealt with in paragraph, shall be determined by first-in-first-out (FIFO) or weighted average cost. An entity shall use the same costing formula for all inventories that have similar properties and uses to the entity. For inventories with dissimilar properties or patterns of use, different costing formulas may be justified.
26 For example, inventory used in one operating segment may be used by an entity differently from similar inventory in another operating segment. However, the difference in the geographic location of the reserves (or in the applicable tax regulations) in itself is not a sufficient basis for using different formulas for calculating the cost.
27 The FIFO formula assumes that those items of inventory that are bought or produced first will be sold first and that, accordingly, those items that remain in inventory at the end of the period were bought or produced last. According to the weighted average cost formula, the cost of each item is determined based on the weighted average of the cost of similar items at the beginning of the period and the cost of similar items purchased or produced during the period. The average value can be calculated on a periodic basis or upon receipt of each new batch, depending on the specifics of the organization's activities.
Net Possible Selling Price
28 The cost of inventory may be non-recoverable if it is damaged, obsolete or partially obsolete, or if its selling price is reduced. The cost of inventories may also be non-recoverable if the estimated cost to complete production or the estimated cost to sell increases. The practice of writing off inventories below cost to their net realizable value is consistent with the principle that assets should not be carried at a cost in excess of the amount expected to be obtained from their sale or use.
29 Inventories are generally written down to net realizable value per item. However, in some cases it may be appropriate to group together similar or related inventory items. This can happen with inventory items belonging to the same assortment, having the same intended use or end use, produced and sold in the same geographic area, and which are impracticable to be valued separately from other items in the same assortment. The wrong approach is to write off inventories based on their classification, for example, write off finished goods or write off all inventories in a particular industry or geographic segment.
30 Estimates of net realizable value are based on the best available evidence of the amount available from sales of inventories when those estimates are made. These estimates take into account price or cost fluctuations directly attributable to events that occurred after the end of the period, to the extent that such events confirm conditions that existed at the end of that period.
31 Estimates of net realizable value (net realizable value) also take into account the intended use of stock held. For example, the net realizable value of the inventory that is intended to fulfill contracts for the sale of goods or the provision of services at fixed prices is determined based on the price specified in those contracts. If the amount of inventory available to fulfill sales contracts is less than the total amount of the underlying inventory, then the net realizable selling price of the surplus is determined based on the total selling prices. In the case of an excess of inventories under contracts for the sale of goods at fixed prices over the volume of available inventories or in the case of contracts for the purchase of inventories at fixed prices, provisions may arise. Such provisions are the subject of IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
32 Raw materials and other materials intended for use in the production of inventories are not written off to a level below cost if the finished goods, of which they will be included, are expected to be sold at a price corresponding to or above cost. However, if a decrease in the price of a raw material indicates that the cost of finished goods is higher than its net realizable value, the raw material is written off to its net realizable value. In such cases, the cost of replacing the raw material may be the best available estimate of its net realizable value.
33 In each subsequent period, the NPL analysis is performed anew. If the circumstances that made it necessary to write off inventories below cost cease to exist or there is clear evidence of an increase in net realizable price due to changed economic conditions, the amount previously written off is reversed (i.e., the recovery is made up to the amount of the original write-down) so that the new carrying amount was the lower of cost or revised net realizable value. This is the case, for example, when an item of inventory that is carried at net realizable value due to an earlier decline in the selling price is still in inventory in a subsequent period and its selling price has increased.
(b) financial instruments (see IAS 32 Financial Instruments: Presentation and IFRS 9 Financial Instruments); and
(c) biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41 " Agriculture").
3 This Standard does not apply to the measurement of reserves held by:
(a) Producers of agricultural and forestry products, post-harvest agricultural products and minerals and processed minerals, provided they are measured at net realizable value in accordance with accepted accounting practices in those industries. If such inventories are measured at net realizable value, changes in that price are recognized in profit or loss in the period in which the changes occurred.
(b) Commodity broker-traders who measure their inventories at fair value less costs to sell. If such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognized in profit or loss in the period in which the changes occur.
4 Inventories referred to in paragraph 3 (a) are measured at net realizable value at specified stages of production. This occurs, for example, when agricultural produce is harvested or minerals are mined and their sale is guaranteed by a forward contract or government guarantee, or when there is an active market and the risk of not securing a sale is negligible. Only the measurement requirements of this International Standard do not apply to such inventories.
5 Broker-traders are persons who buy or sell goods on behalf of others or at their own expense. The inventories referred to in paragraph 3 (b) are principally acquired with the intent to sell in the foreseeable future and to profit from fluctuations in price or from broker-trader's margin. If such inventories are measured at fair value less costs to sell, then only the measurement requirements of this Standard are excluded.
Definitions
6 The following terms are used in this Standard with the meanings specified:
Stocks are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of raw materials or materials that will be consumed in the production or provision of services.
Net selling price is the estimated selling price in the ordinary course of business less the estimated costs of completion of production and the estimated costs to be incurred to sell.
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 (see IFRS 13 Fair Value Measurement).
7 Net realizable value refers to the net amount that the entity expects to receive from the sale of inventories in the ordinary course of business. Fair value reflects the price of such inventory that would be voluntary to sell the same inventory in the primary (or most advantageous) market between market participants at the measurement date. The former is entity-specific cost, the latter is not. The net selling price of inventories may differ from their fair value less costs to sell.
8 Inventory also includes goods purchased and held for resale, including, for example, goods purchased by a retailer and held for resale, or land and other property held for resale. Inventories also include the finished goods or work in progress of the organization, including raw materials and materials intended for use in the production process. Costs incurred to complete a contract with a customer that do not give rise to inventories (or assets within the scope of another standard) are accounted for in accordance with IFRS 15 Revenue from Contracts with Customers.
Estimation of reserves
9 Inventories should be measured at the lower of cost or net realizable value.
Cost of inventory
10 The cost of inventory shall include all acquisition costs, processing costs and other costs incurred to maintain the current location and condition of the inventory.
Acquisition costs
11 The cost of acquiring inventory includes the purchase price, import duties and other taxes (except for those that are subsequently reimbursed to the enterprise by the tax authorities), as well as costs of transportation, handling and other costs directly attributable to the purchase of finished goods, materials and services. Trade markdowns, discounts and other similar items are deductible in determining acquisition costs.
Processing costs
12 Inventory processing costs include costs, such as direct labor costs, that are directly related to the production of a product. They also include systematically allocated fixed and variable production overheads arising from the conversion of raw materials into finished goods. Fixed production overheads are indirect production costs that remain relatively constant regardless of production volume, such as depreciation and maintenance of production buildings and equipment, and production-related management and administration costs. Variable production overheads are indirect production costs that are directly or almost directly related to the volume of production, for example, indirect costs of raw materials or indirect costs of labor.
13 The allocation of fixed production overheads to processing costs is based on normal production capacity. Normal production is the production that is expected to be achieved based on averages over a number of periods or seasons of normal operation, taking into account productivity losses due to scheduled maintenance. Actual production can only be used if it approximates normal production. The amount of fixed overheads attributed to each product does not increase as a result of low production or downtime. Unallocated overheads are recognized as an expense in the period in which they are incurred. During periods of unusually high levels of production, the amount of fixed overheads attributed to each unit of output is reduced so that inventory is not valued above cost. Variable production overheads are allocated per unit of production based on actual capacity utilization.
14 More than one product can be produced at the same time in a manufacturing process. This occurs, for example, in the production of co-products or a main product and a by-product. If the processing costs for each product cannot be identified separately, they are allocated to the products on a prorated and consistent basis. For example, distribution can be based on the relative sales value of each product, either at a stage in the manufacturing process when the products become individually identifiable, or at the end of production. Most by-products are inherently non-essential. In such cases, they are often measured at net realizable value, and this value is deducted from the cost of the main product. As a consequence, the book value of the main product does not differ significantly from its cost price.
Other costs
15 Other costs are included in the cost of inventory only to the extent that they are incurred to support the current location and condition of the inventory. For example, it might be appropriate to include non-manufacturing overheads or customer-specific product development costs in the cost of inventory.
16 Examples of costs not included in the cost of inventories and recognized as an expense in the period in which they are incurred are:
(a) excess loss of raw materials, labor expended or other production costs;
(b) storage costs, unless they are required in the production process to proceed to the next stage of production;
(c) administrative overheads that do not help maintain the current location and status of stocks;
(d) costs of sale.
17 IAS 23 Borrowing Costs identifies those rare cases where borrowing costs are included in the cost of inventory.
18 An entity may acquire inventories on a deferred basis. If the arrangement actually contains a financing element, the element, such as the difference between the purchase price under the regular trade credit terms and the amount paid, is recognized as an interest expense over the financing period.
Cost of harvested agricultural products derived from biological assets
20 In accordance with IAS 41 Agriculture, inventories consisting of harvested agricultural produce that an entity obtains from its biological assets are measured on initial recognition at fair value at the time of harvest less estimated costs to sell. This is the cost of inventories at that date for the application of this Standard.
Cost estimation methods
21 For convenience, inventory costing techniques such as standard cost accounting or retail price accounting may be used if their results approximate cost. Standard costs take into account normal levels of consumption of raw materials and supplies, labor, efficiency and productivity. They are regularly reviewed and revised, if necessary, taking into account current conditions.
22 The retail price method is often used in retail for the valuation of inventories consisting of a large number of rapidly changing items with the same rate of return, for which it is practically impossible to use other methods of determining the cost. The unit cost of inventory is determined by decreasing the selling price of that unit of inventory by an appropriate percentage of gross profit. The percentage used is based on inventory that has been reduced in value below its original selling price. The average percentage for each retail department is often used.
Cost calculation methods
23 The cost of inventories of items that are not normally fungible, as well as goods or services produced and allocated for specific projects, should be determined using specific identification of specific costs.
24 Specific identification of costs means that specific costs are attributed to identified inventory items. This accounting treatment is appropriate for project-specific items, whether purchased or produced. However, specific identification of costs is not appropriate when there are a large number of inventory items that are usually interchangeable. In such cases, a method of selecting those items of inventory that remain in inventory could be used to obtain a predetermined amount of the effect on profit or loss.
25 The cost of inventories, other than those dealt with in paragraph 23, shall be determined using the first-in-first-out (FIFO) or weighted average cost method. An entity must use the same costing method for all inventories that have the same nature and use by the entity. For inventories with a different nature or use, different costing methods may be justified.
26 For example, inventory used in one operating segment may be used by an entity differently from similar inventory in another operating segment. However, differences in the geographic location of inventories (or in applicable tax rules) are not, in themselves, sufficient to justify using different costing methods.
27 The FIFO method assumes that those items of inventory that are bought or produced first will be sold first and that, accordingly, those items that remain in inventory at the end of the period were bought or produced last. Under the weighted average cost method, the cost of each item is determined based on the weighted average of the cost of similar items at the beginning of the period and the cost of similar items purchased or produced during the period. The average value can be calculated on a periodic basis or upon receipt of each new batch, depending on the specifics of the enterprise.
Net selling price
28 The cost of inventory may be non-recoverable if damaged, obsolete or partially obsolete, or if its selling price is reduced. The cost of inventories may also be non-recoverable if the estimated cost to complete production or the estimated cost to sell increases. The practice of writing off inventories below cost to their net realizable value is consistent with the principle that assets should not be carried at a cost in excess of the amount expected to be obtained from their sale or use.
29 Inventories are generally written down to net realizable value on a line-by-line basis. However, in some cases it may be useful to group similar or related articles together. This can happen to inventory items that belong to the same assortment, which have the same intended use or end use, are produced and sold in the same geographic area, and which are impracticable to be measured separately from other items in the same assortment. The wrong approach is to write off inventories based on their classification, for example, write off finished goods or write off all inventories in a specific industry or geographic segment.
30 Estimates of net realizable value are based on the best available evidence of the amount available from sales of inventories at the time those estimates are made. These estimates take into account price or cost fluctuations directly attributable to events that occurred after the end of the period, to the extent that such events confirm conditions that existed at the end of that period.
31 Estimates of net realizable value also take into account the intended use of stock held. For example, the net selling price of the volume of inventory that is intended to fulfill contracts for the sale of goods or the provision of services at fixed prices is determined based on the price specified in these contracts. If the amount of inventory available for the fulfillment of sales contracts is less than the total amount of the corresponding inventory, then the net selling price of the surplus is determined based on the total sales prices. Valuations may arise from the excess of inventory volumes under contracts for the sale of goods at fixed prices over the volume of available inventories or from contracts for the purchase of inventories at fixed prices. Such provisions are the subject of IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
32 Raw materials and other materials intended for use in the production of inventories are not written off to a level below cost if the finished goods, of which they will be included, are expected to be sold at a price corresponding to or above cost. However, if a decrease in the price of raw materials indicates that the cost of finished goods exceeds the net realizable value, the raw materials are written off to their possible net realizable value. In such cases, the cost of replacing the raw material may be the best available estimate of its net realizable value.
33 In each subsequent period, the net realizable value is revalued. If the circumstances that made it necessary to write off inventories below cost cease to exist or there is clear evidence of an increase in net realizable value due to changed economic conditions, the amount previously written off is reversed (i.e., the reversal is made within the amount of the original write-off) so that the new the carrying amount was the lower of cost or revised possible net realizable value. This is the case, for example, when an item of inventory that is carried at net realizable value due to a decline in the selling price earlier still remains in inventory in a subsequent period and its selling price has increased.
Recognition as an expense
34 When inventories are sold, the carrying amount of those inventories shall be recognized as an expense in the period in which the related revenue is recognized. The amount of any markdown on inventories to net realizable value and all losses on inventories should be recognized as an expense in the period in which the markdown was made or the loss occurred. The amount of any reversals of inventory write-downs made due to an increase in net realizable value should be recognized as a decrease in the expense of inventories in the period in which the reversal entry was made.
35 Certain inventories may be allocated to other asset accounts, for example, inventories used as a component of self-constructed property, plant and equipment. Inventories allocated to other assets are recognized as an expense over the useful life of the related asset.
Information disclosure
After completing this chapter, you will be able to:
- to characterize the composition of the reserves;
- describe five possible ways to determine the value of inventories, including by the method of specific identification, by the FIFO method, by the LIFO method, by the weighted average cost and by the basic stock method;
- show the effect of using various methods for assessing stocks on the indicators of annual profit and trends in its changes;
- discuss the requirements of IFRS 2 related to inventories;
- define contracts for work, attributive profit and predictable losses;
- assess the requirements of IFRS 11 related to construction contracts;
- calculate the amounts disclosed in financial statements under a work contract;
- compare IFRS 2 and 11 and the requirements of other accounting systems (GAAP);
- determine the procedure for disclosing information in accordance with IFRS 2 and 11.
Introduction
Accounting for inventories, including work in progress, presents certain difficulties for an accountant. First, you need to determine the unit cost of your inventory. Second, the principle of discretion should be followed as much as possible in the accounting process. Thirdly, it is necessary to determine the moment of recognition of revenue (sale) and then use the method of matching income and expenses. The fulfillment of these conditions is especially difficult in the case of work contracts, due to their long-term nature. In this regard, a separate consideration of the accounting for work contracts, as is done in the standards, seems useful. First of all, we will look at inventory and work in progress, which are not related to work contracts.
inventory estimation should be approached with the utmost care, since this is a key factor that largely determines the cost of sales and, accordingly, net profit.
Stocks
Inventories include:
- Goods and other assets held for resale.
- Consumables.
- Raw materials and components intended for use in the manufacture of products.
- Products and services of intermediate stages of production.
- Finished products.
Determining the unit cost of inventory at any of the above stages of production is key to determining the cost of goods sold and the value of inventory remaining in production, as well as the level of inventory at the end of the reporting period, which is likely to be reflected in items of current (current, current) balance sheet assets.
Obviously, when determining the cost of such stocks, we need to take into account not only the cost of raw materials and components, but also the cost of processing raw materials into finished products or services for sale. Thus, when valuing inventory, we must take into account purchase and handling costs, including both direct costs and indirect (overhead) costs.
It is obvious that the application of these principles in practice is associated with a number of problems. Direct costs do not present any particular difficulties, since these figures, by definition, can be attributed directly (directly) to the cost price. However, when allocating overhead costs, we are forced to proceed from certain principles and assumptions and ask the following questions: how to determine the normal level of production for a given year? Is it possible to clearly categorize overhead costs by function? What other (non-production) overhead costs can be attributed to the product currently in inventory? Therefore, if the products in the inventory have not yet reached the stage of initial sale, it is a whole problem to determine the cost of a unit and even a batch of such products. To solve it, in practice, such methods are used as order-by-order (item-by-item) and process-by-process accounting of costs, calculation of the cost of a batch of goods and a standard cost accounting method. All of these methods involve a more or less arbitrary allocation of overhead costs.
After we have determined the unit cost of production as of the current moment, we are faced with another problem, since we need to choose an adequate method of accounting for the corresponding costs for the same type of product that was purchased or manufactured at different times, as a result of which the unit cost of such products will be different ...
Consider the following operations:
Inventory valuation methods
Let's discuss five possible options.
- Method for specific identification of reserves
Here we proceed from the fact that we know the number of real, physically received or dropped units of production. Each item of product must be clearly identifiable, for example by serial numbers. Then, in order to determine the cost of goods sold and the value of inventory, we do something that is practically impossible in other cases - we simply summarize the entered data about the value of such goods sold. There is no need to further illustrate this method.
- FIFO ("first in, first out")
In this case, it is assumed that stocks that are earlier in time of acquisition (that is, those that arrive first) are consumed or sold first. Thus, it is considered that the products remaining in the warehouse consist of the products that arrived last.
Target 15.1
Using the data provided and the FIFO inventory valuation method, calculate the cost of goods sold and gross profit.
Cost price products |
|||||
January | 10 | by Є25 | = | Є250 | |
February | 15 | by Є30 | = | 450 | |
25 | 700 | ||||
March | -10 | by Є25 (Jan.) | = | 250 | |
-5 | by Є30 (Feb) | = | 150 | 400 | |
10 | 300 | ||||
April | 20 | by Є35 | = | 700 | |
30 | 1000 | ||||
May | -10 | by Є30 (Feb) | = | 300 | |
-8 | until Є35 (Apr) | = | 280 | 580 | |
Total reserves at the end of May | 12 | 420 | |||
Є 980 |
The implementation was: 750 + 1080 = Є1830
The purchase was: 250 +450 +700 = Є1400
LIFO ("last in, first out")
Here we proceed from the opposite assumption. We will assume that the first to be consumed or sold are those products that arrived at the warehouse last. Thus, the products remaining in the warehouse will represent the earliest purchases in time.
The LIFO method is prohibited for use in the new edition of IFRS 2-2003, cat. entered into force on January 01, 2005
Target 15.2
Using the data provided and the LIFO inventory method, calculate your cost of sales and gross margin.
Cost price implemented products |
|||||
January | 10 | by Є25 | = | Є250 | |
February | 15 | by Є30 | = | 450 | |
Total inventory at the end of February | 25 | 700 | |||
March | -15 | by Є30 (Feb) | = | 450 | 450 |
Total inventory at the end of March | 10 | 250 | |||
April | 20 | by Є35 | = | 700 | |
Total inventory at the end of April | 30 | 950 | |||
May | -18 | until Є35 (Apr) | = | 630 | 630 |
-2 | by Є35 | ||||
and 10 to Є25 | = | 320 | |||
Є1080 |
Weighted average cost
Here we use a weighted average cost based on different proportions applied for different inventory levels. In the following example, we will look at this method in detail and provide the corresponding calculations. At the same time, in practice, for this method, instead of the average cost of inventories, the average cost of purchases is more often used. This allows you to reduce the calculations and restrict the calculation of periodic requirements down to calculating only the annual requirement.
Target 15.3
Using the data provided and the weighted average cost method, calculate your cost of sales and gross profit.
Cost price implemented products |
|||||
January | 10 | by Є25 | = | Є250 | |
February | 15 | by Є30 | = | 450 | |
Total inventory at the end of February | 25 | by Є28 | 700 | ||
March | -15 | by Є28 | = | 420 | 420 |
Total inventory at the end of March | 10 | by Є28 | 280 | ||
April | 20 | by Є35 | = | 700 | |
Total inventory at the end of April | 30 | by Є32 2/3 | 980 | ||
May | -18 | by Є32 2/3 | = | 588 | 588 |
Total reserves at the end of May | 2 | by Є32 2/3 | = | 392 | |
Є1008 |
Calculation: [(10 x 25) + (15 x 30)] / (10 + 15) = 28
[(10 x 28) + (20 x 35)] / (10 + 20) = 32 2/3
Base reserves
This approach is based on the assumption that there is a certain minimum level of reserves, without which the company cannot conduct business. Therefore, it can be argued that this part of the company's total inventories cannot actually be regarded as available-for-sale inventory, but should be attributed to property, plant and equipment. The management of the company determines the level of such minimum reserves, which are recorded at their original cost, and the remaining inventory, above this minimum level, is estimated by some other method. Let's assume that the minimum inventory level for our example is set at 10 product units.
Target 15.4
Using the FIFO inventory method, calculate cost of goods sold and gross margin if the minimum inventory level is 10 items.
Solution
Purchase of basic stocks in January: 10 pcs. by Є25 = Є250
In this example, the gross margin calculated by this method (Inventory Baseline + FIFO) is the same as the result obtained using the LIFO method. Can you explain why? Generally, the results are not the same.
So which method or methods should be preferred?
When making a decision, the company's management, apparently, should first of all pay attention to the extent to which the estimation of reserves using the chosen method reflects the real level of their value. Thus, estimating the cost of inventories using the standard cost method requires frequent revision of the level of such costs in order to ensure that they correspond to the real increase in costs over the period. The use of the base stock method and the LIFO method often leads to the fact that the amount of stock, reflected in the company's balance sheet, has little in common with the current level of costs. This is fraught not only with obtaining incorrect data on current assets, but can also affect subsequent calculations and lead to serious distortions in the reporting, especially if the level of inventories falls, and indicators of the value of the past period are included in the income statement. At the same time, in some cases, the use of the FIFO method is, in principle, impossible, since the value calculated by this method does not always correspond to the actual value, and in conditions of rising prices, the value of profit obtained on the basis of this method will be overestimated, that is, it will be higher than the actual value obtained. arrived. For example, compare the indicators of the cost of goods sold in May, calculated above using the LIFO and FIFO methods. Which option is preferable: the accrual of April costs for April revenue (LIFO) or at least partial accrual of the February costs for April revenue (FIFO)? At the same time, criticism of the LIFO method from the standpoint of compiling a balance sheet seems to be more justified. Using the LIFO method and the basic stock method, we can, with a high degree of probability, find completely outdated values in the final line of the balance sheet. At the same time, accounting for all inventory at the last purchase price, which is sometimes called the NIFO method, or "next in, first out", may be in principle unsuitable for the same reasons as the LIFO method.
Before moving on to IFRS 2 and analyzing the ways to solve this problem outlined in it, we will consider another important issue. In the previous tasks, we always managed to clearly establish the moment of sale of individual goods, but in practice this is not always possible.
Inventory accounting systems
- Periodic inventory system
According to this system of accounting for stocks, their value is determined in the process of physical calculation of stocks at a certain date. If the frequency of the inventory meets the purposes of accounting, there is no need to store large amounts of inventory information. The quantity of inventories shown on the balance sheet is determined by physical calculation and their value is determined in accordance with the applied method of inventory valuation. The net difference between inventory balances at the beginning and end of the reporting period is charged to cost of goods sold, goods and services.
- Continuous inventory system
In a continuous inventory accounting system, records are maintained and updated continuously as goods arrive or are withdrawn. The advantage of this system is that it allows you to receive information about the current state of stocks at any time. However, maintaining this system requires an extensive inventory of inventory information. Practice audits will undoubtedly require periodic physical inventory counts to verify that the records are consistent with their physical volume.
IFRS requirements for inventories
So, we have found out that an adequate estimation of the cost of inventory at cost price is not an easy task. Determining the cost of a unit of production and how this cost relates to the cost of goods sold, we are forced to proceed from certain assumptions. At the same time, the de facto rules of standard accounting practice are formulated as briefly as possible and do not address these difficulties: “Inventories should be measured at the lower of cost or net realizable value (NRV) 1”. It is interesting to note that this standard covers the preparation of financial statements using the accounting system at original cost. Does this mean that this standard is not applicable when using other scoring systems? In this regard, note that this standard was first published in 1975 and revised in 1993.
- Definitions
This standard contains only two definitions, they are given in clause 6:
Stocks are assets:
- held for sale in the normal course of business;
- in the production process for such a sale; or
- in the form of raw materials or materials intended for use in a manufacturing process or in the provision of services.
Possible net realizable value is the expected selling price in the normal course of business less the potential development costs and the potential sale costs of the asset.
Paragraph 8 of IFRS 1 also states that inventories are “goods purchased and held for resale. These include, for example, goods purchased by a retailer or land and other property held for resale. Inventories also include finished or work-in-process products manufactured by the company and include raw materials and materials intended for further use in the production process. In the case of a service company, inventories include the cost of service for which the company has not yet recognized an appropriate amount of revenue. ”
- Separate accounting
Since the value of inventory is determined by the lower of two values: cost price or NRV, for each item of inventory, we need to determine:
- cost price,
Target 15.5
Using the example of the following task, you can see how important is the role of maintaining separate accounting for individual stock items.
The company's inventory includes three items of goods, the cost of which is shown in the table:
What will be the total carrying amount of inventory calculated in accordance with IFRS 2?
Solution
If the inventories were not broken down into separate positions, we would have chosen the smallest value of the two data: the cost price, equal to 33, and the NRV, equal to 36. The answer is 33. However, IFRS 2 prescribes to keep separate accounting by the names of the inventories, so in our case we add up the value 10 at A, 11 at B, and 9 at C to get the total book value of inventory equal to 30.
- Inventory value
The standard contains the following guidance on the cost of inventories (paragraph 10):
"The cost of inventory should include all acquisition, processing and other costs incurred to bring inventory to its current state and location."
In p.p. 11 and 12 reveal the concept of cost in more detail:
8. Inventory acquisition costs include the purchase price, import duties and other taxes (other than those subsequently reimbursed to the company by the tax authorities), as well as transportation, handling and other costs directly attributable to the acquisition of the item. Trade discounts, rebates and other similar items are deducted in determining acquisition costs.
9. In the rare circumstances provided for by an acceptable alternative treatment in International Financial Reporting Standard IAS 21, the impact of changes in foreign exchange rates, purchase costs may include exchange differences arising directly from recent acquisitions of inventories invoiced in foreign currency... These exchange differences are only allowed when they arise as a result of a major devaluation or depreciation of the currency that cannot be avoided by any practical means and which affect the outstanding liabilities arising from newly acquired inventories. "
In p.p. 12, 13, 14 consider the processing costs and problems associated with their accounting. Processing costs include direct costs of labor for production workers, systematically allocated fixed production overheads such as depreciation and maintenance costs, and variable production overheads such as supplies and labor. (It should be remembered that fixed overhead costs are such indirect production costs, the value of which remains relatively unchanged and does not depend on the volume of production, while the amount of variable overhead costs is in a strict, almost direct dependence on the volume of production.)
When distributing fixed overhead costs, they proceed from the condition of normal utilization of production capacities, taking into account downtime due to planned maintenance measures and variable overhead costs for the actual use of production capacities. In the case of related industries, it is necessary to develop a reasonable system for distributing processing costs between them.
As an example of such a reasonable and consistent system, the standard proposes the use of the relative cost of sales method. To a certain extent, this method is based on arbitrary and subjective assessments, nevertheless, it is, if not completely based on logic, then at least a sequential method for solving a complex problem.
Target 15.6
Calculate the value of stocks for items A and B based on the following data:
Fixed overhead production costs are £ 50,000; at a normal level of capacity utilization, the company produces 5200 pcs. products A and 10 200 pcs. of product B, but as a result of downtime caused by scheduled maintenance measures, in fact, 200 pieces are produced. fewer items A and 200 pcs. fewer items B. The planned target for the production of item A is 6,000 pcs., for item B - 12,000 pcs. It is assumed that the value of item B will be twice the value of item A. The estimated total value of variable overhead production costs is Є10,000, this amount must be allocated based on the number of machine hours. Product A takes two machine hours to produce, and product B takes one machine hour.
Solution
Fixed overhead production costs should be attributed to the production of 5,000 pieces. products A and 10,000 pcs. product B, as this will be the normal production volume of these products, taking into account the downtime caused by scheduled maintenance. The value of the planned target in such calculations is not taken into account until production actually reaches this level, after which the value of fixed overhead production costs per unit of output will be reduced to avoid overstating the unit cost.
Target 15.7
Calculate the IFRS 2 inventory value based on the following Unipoly business data for the year ended 31 May 20X7:
At the end of the year, the number of finished products was 250,000 units. When solving the problem, we will assume that at the beginning of the year there were no finished products and no work in progress. Normal production is 750,000 can openers per year, but in the year ended 31 May 20X7 only 450,000 were produced due to labor disputes.
Solution
Direct costs of producing inventory can be obtained as a result of direct addition:
Since, in accordance with IFRS 2, only production overhead costs are included in the inventory valuation, administration costs, sales organization costs and interest costs for this task are not taken into account (unless interest costs are included in the permitted alternative). approach under IAS 23 Borrowing costs) (see Chapter 12).
Overhead production costs were: 600,000 x 250,000 / 750,000 = 200,000. Excessive costs caused by labor disputes will be charged to the expense in the period in which they arise.
Finished product cost = Є950,000.
Target 15.8
Which of the following costs can be included in the cost of inventories under IFRS 2?
Information p.p. 10-20 IFRS 2 will help you with this task
- Purchase price discounts
- Travel expenses suppliers
- Import duties
- Cargo delivery insurance from the supplier to the company's warehouse
- Broker commission and cost
- Material storage costs incurred after receipt of materials
- and which are necessary to ensure the production process
- Sales department salary
- Warranty costs
- Research costs for new products
- Audit and tax consulting costs
- Costing methods
The standard allows the application of the method of standard costs, in this case, data corresponding to the normal volume of stocks of materials, equipment, normal level of labor costs and efficiency at normal utilization of production facilities will be used to calculate the standard cost of a unit of production. When using this method, it is necessary to periodically review the value of the standard costs.
The standard also permits the use of the retail price method. This method is commonly used in the retail industry to estimate large volumes of rapidly changing product lines with the same trade margin. In this case, the value of inventories is determined by reducing the total retail value of sales by the amount of the corresponding gross profit. However, if the assortment of a trading company consists of products, the trading margin on which varies greatly, as well as in the case of discounts on a slow-moving product, this method poses certain problems.
- Value formulas
The value of stocks of products that, under normal conditions, cannot be classified as fungible, as well as goods and services produced and allocated for specific projects, should be determined based on the method of specific identification (clause 23).
If it is difficult to allocate specific expenses for certain types of products in the composition of inventories (which rarely happens in practice), IFRS 2 proposes to use the FIFO method or the weighted average cost method as the main one. By using the word “primary” rather than “preferred” in this context, the board members of the IASB were intended to provide some guidance from which they proceeded when making choices from the options available. To do this, the board representatives used the word "primary" instead of "preferred." In our opinion, the reason is that the word “main” is not as categorical as “preferred”.
As part of the alternative approach, IFRS 2 allows the use of the LIFO method. In the new edition of IFRS, this approach is inadmissible.
However, the standard does not attempt to justify the use of the FIFO or LIFO method. But do not forget that the use of the LIFO method during the period of price increases leads to an underestimation of profits and the total book value of inventories in this case will be calculated based on the prices of previous periods, at the same time, the use of the FIFO method allows us to estimate the book value of inventories at current prices, in than many see the advantage of this method.
Comparison with selected national GAAP accounting systems: UK GAAP and US GAAP
UK Generally Accepted Accounting Principles (UK GAAP): Under UK GAAP 9 Inventories and Long-Term Contracts, the LIFO approach is generally considered impractical.
US Generally Accepted Accounting Principles (US GAAP): Inventories are measured at the lower of cost or market value, where market value is commonly understood as recoverable amount
In general, in other aspects, UK GAAP and US GAAP are comparable to IFRS
- Disclosure requirements
In accordance with IFRS 2, the following information must be disclosed in the financial statements:
- the accounting policy adopted for the valuation of inventories, including the method used to calculate their cost;
- the total carrying amount of inventories and the carrying amount of individual classes of inventories, according to the company's classification;
- the carrying amount of inventories recorded at net realizable value;
- the amount of the return on any write-down that is recognized as income in the current period in accordance with paragraph 31 (paragraph 34 as amended by IFRS2);
- the carrying amount of inventories pledged as security for liabilities ( New edition IFRS2 has expanded the list of items that need to be disclosed in the financial statements of IFRS2).
In addition, if the LIFO method is used to estimate the cost of inventories, it is also necessary for comparison to give the results of calculating the estimate of the cost of inventories based on the smallest value of the pair of values: the FIFO value (or weighted average cost) and NRV or the present value and NRV.
The financial statements must also disclose one of the following:
The financial statements must also disclose one of the following:
- the cost of inventories recognized as an expense for the current period;
- operating costs related to revenue recognized as RAL in this period classified by their nature.
Below is an example of disclosures in accordance with IFRS 2 on the axis financial report for 2000 of the Bauer’s company
The cost of raw materials, equipment and products purchased for resale is based on the purchase price; the cost of finished goods and work-in-progress is determined on the basis of production costs. If the value of the inventory at the end of the period has decreased due to a fall in market prices, the lower value is reported. At 31 December 2000, inventories were valued at € 6,095 million, of which inventories carried at net realizable value were € 431 million. The cost of inventories is estimated using the weighted average cost method.
Manufacturing costs included direct costs of acquiring materials, direct manufacturing costs, appropriately allocated costs of ancillary materials and manufacturing, and the corresponding depreciation and write-down costs of assets used for manufacturing.
This also includes the costs of the company for the company's pension plans, certain costs of additional employee benefits to the extent that they are related to production. These costs include a portion of the administrative costs that can be directly attributed to production.
The grouping of items of work in progress and finished goods reflects the stages of the production cycle in the chemical industry. The composition of the reserves is presented in Table 15.1.
Table 15.1 Composition of inventories of a chemical company
Target
The objective of this Standard is to prescribe the accounting treatment for inventories. A primary issue in accounting for inventories is the amount of cost to be recognized as an asset and carried forward until the related revenues are recognized. This Standard provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.
The objective of this Standard is to prescribe the accounting treatment for inventories. The main issue in accounting for inventories is to determine the amount of costs that is recognized as an asset and carried forward until the corresponding revenue is recognized. This Standard provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value. It also provides guidance on the costing formulas that are used to allocate costs to inventory.
Scope of application
This Standard applies to all inventories, except:
This Standard applies to all inventories except the following:
Excluded.
Financial instruments (see IAS 32 Financial Instruments: Presentation and IFRS 9 Financial Instruments); and
Financial Instruments (see IAS 32 Financial Instruments: Presentation and IFRS 9 Financial Instruments); and
Biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41 Agriculture).
Biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41 Agriculture).
This Standard does not apply to the measurement of inventories held by:
This Standard does not apply to the measurement of reserves 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 realizable value in accordance with well-established practices in those industries. When such inventories are measured at net realisable value, changes in that value are recognized in profit or loss in the period of the change.
Producers of agricultural and forestry products, post-harvest agricultural products, and minerals and processed minerals, provided they are valued at net realizable value in accordance with accepted accounting practices in these industries. If such inventories are measured at their net realizable value, changes in that price are recognized in profit or loss in the period in which the changes occurred;
Commodity broker-traders who measure their inventories at fair value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognized in profit or loss in the period of the change.
Commodity brokers are traders who measure their inventory at fair value less costs to sell. If such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognized in profit or loss in the period in which the changes occur.
The inventories referred to in paragraph 3 (a) are measured at net realisable value at certain stages of production. This occurs, for example, when agricultural crops have been harvested or minerals have been extracted and sale is assured under a forward contract or a government guarantee, or when an active market exists and there is a negligible risk of failure to sell. These inventories are excluded from only the measurement requirements of this Standard.
The inventories referred to in paragraph 3 (a) are measured at net realizable value at specific stages of production. This occurs, for example, when agricultural produce is harvested or minerals are mined and their sale is guaranteed by a forward contract or government guarantee, or when there is an active market and the risk of not securing a sale is negligible. Only the measurement requirements of this International Standard do not apply to such inventories.
Broker-traders are those who buy or sell commodities for others or on their own account. The inventories referred to in paragraph 3 (b) are principally acquired with the purpose of selling in the near future and generating a profit from fluctuations in price or broker-traders' margin. When these inventories are measured at fair value less costs to sell, they are excluded from only the measurement requirements of this Standard.
Broker-traders are persons who buy or sell goods on behalf of others or at their own expense. The inventories referred to in paragraph 3 (b) are principally acquired with the intent to sell in the foreseeable future and to profit from fluctuations in price or from broker-trader's margin. If such inventories are measured at fair value less costs to sell, then only the measurement requirements of this Standard are excluded.
Definitions
Definitions
The following terms are used in this Standard with the meanings specified:
The following terms are used in this Standard with the meanings specified:
Inventories
- (a) held for sale in the ordinary course of business;
- (b) in the process of production for such sale; or
- (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.
Stocks
- (a) held for sale in the ordinary course of business;
- (b) in the process of production for such sale; or
- (c) in the form of raw materials or materials that will be consumed in the process of production or provision of services.
Net realisable value
is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
Net Possible Selling Price
the estimated selling price in the ordinary course of business less the estimated costs of completion of production and the estimated costs to be incurred to sell.
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. (See IFRS 13 Fair Value Measurement.)
fair value
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 (see IFRS 13 Fair Value Measurement).
Net realisable value refers to the net amount that an entity expects to realize from the sale of inventory in the ordinary course of business. Fair value reflects the price at which an orderly transaction to sell the same inventory in the principal (or most advantageous) market for that inventory would take place between market participants at the measurement date. The former is an entity-specific value; the latter is not. Net realisable value for inventories may not equal fair value less costs to sell.
Net realizable value refers to the net amount that the entity expects to receive from the sale of inventory in the normal course of business. Fair value reflects the price of such inventory that would be in an orderly transaction to sell the same inventory in the primary (or most advantageous) market between market participants at the measurement date. The former is organization-specific cost, the latter is not. The net realizable value of the inventory may differ from its fair value less costs to sell.
Inventories encompass goods purchased and held for resale including, for example, merchandise purchased by a retailer and held for resale, or land and other property held for resale. Inventories also encompass finished goods produced, or work in progress being produced, by the entity and include materials and supplies awaiting use in the production process. Costs incurred to fulfil a contract with a customer that do not give rise to inventories (or assets within the scope of another Standard) are accounted for in accordance with IFRS 15 Revenue from Contracts with Customers.
Inventory also includes goods purchased and held for resale, including, for example, goods purchased by a retailer and held for resale, or land and other property held for resale. Inventories also include the finished goods or work in progress of the organization, including raw materials and materials intended for use in the production process. Costs incurred to complete a contract with a customer that do not give rise to inventories (or assets within the scope of another standard) are accounted for in accordance with IFRS 15 Revenue from Contracts with Customers.
Measurement of inventories
Estimation of reserves
Inventories shall be measured at the lower of cost and net realisable value.
Inventories must be measured at the lower of cost or net realizable value.
Cost of inventories
Cost of inventory
The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
The cost of inventory must include all acquisition costs, processing costs and other costs incurred to maintain the current location and condition of the inventory.
Costs of purchase
Acquisition costs
The costs of purchase of inventories comprise the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services ... Trade discounts, rebates and other similar items are deducted in determining the costs of purchase.
Inventory acquisition costs include the purchase price, import duties and other taxes (excluding those that are subsequently reimbursed by the tax authorities), as well as costs of transportation, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Trade discounts, rebates and other similar items are deductible in determining acquisition costs.
Costs of conversion
Processing costs
The costs of conversion of inventories include costs directly related to the units of production, such as direct labor. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings, equipment and right-of-use assets used in the production process, and the cost of factory management and administration. Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labor.
Inventory processing costs include costs such as direct labor costs that are directly related to the production of a product. They also include systematically allocated fixed and variable production overheads arising from the conversion of raw materials into finished goods. Fixed production overhead costs are indirect production costs that remain relatively constant regardless of production volume, such as depreciation and maintenance of production buildings, equipment and right-of-use assets that are used in the production process, and management and administrative costs associated with production. Variable production overheads are indirect production costs that are directly or almost directly related to the volume of production, such as indirect costs of raw materials or indirect costs of labor.
The allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities. Normal capacity is the production expected to be achieved on average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The actual level of production may be used if it approximates normal capacity. The amount of fixed overhead allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognized as an expense in the period in which they are incurred. 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. Variable production overheads are allocated to each unit of production on the basis of the actual use of the production facilities.
The allocation of fixed production overheads to processing costs is based on normal capacity utilization. Normal utilization is the amount of production that is expected to be achieved based on averages over a number of periods or seasons of normal operation, taking into account productivity losses due to scheduled maintenance. Actual production can only be used if it approximates normal production. The amount of fixed overheads attributed to each product does not increase as a result of low production or downtime. Unallocated overheads are recognized as an expense in the period in which they are incurred. During periods of unusually high levels of production, the amount of fixed overheads attributed to each unit of output is reduced so that inventory is not valued above cost. Variable production overheads are allocated per unit of production based on actual capacity utilization.
A production process may result in more than one product being produced simultaneously. This is the case, for example, when joint products are produced or when there is a main product and a by-product. When the costs of conversion of each product are not separately identifiable, they are allocated between the products on a rational and consistent basis. The allocation may be based, for example, on the relative sales value of each product either at the stage in the production process when the products become separately identifiable, or at the completion of production. Most by-products, by their nature, are immaterial. When this is the case, they are often measured at net realisable value and this value is deducted from the cost of the main product. As a result, the carrying amount of the main product is not materially different from its cost.
More than one product can be produced at the same time during the production process. This occurs, for example, in the production of co-products or a main product and a by-product. If the processing costs for each product cannot be identified separately, they are allocated to the products on a prorated and consistent basis. For example, distribution can be based on the relative sales value of each product, either at a stage in the manufacturing process when the products become individually identifiable, or at the end of production. Most by-products are inherently non-essential. In such cases, they are often measured at their net realizable value, which is deducted from the cost of the main product. As a consequence, the book value of the main product does not differ significantly from its cost price.
Other costs
Other costs
Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be appropriate to include non-production overheads or the costs of designing products for specific customers in the cost of inventories.
Other costs are included in the cost of inventory only to the extent that they were incurred to support the current location and condition of the inventory. For example, it might be appropriate to include non-manufacturing overheads or customer-specific product development costs in the cost of inventory.
Examples of costs excluded from the cost of inventories and recognized as expenses in the period in which they are incurred are:
Examples of costs not included in the cost of inventories and recognized as an expense in the period in which they are incurred are:
Abnormal amounts of wasted materials, labor or other production costs;
Excessive losses of raw materials, labor expended or other production costs;
Storage costs, unless those costs are necessary in the production process before a further production stage;
Storage costs, unless they are required in the production process to move to the next stage of production;
Administrative overheads that do not contribute to bringing inventories to their present location and condition; and
Administrative overheads that are not conducive to maintaining the current location and status of stocks; and
Selling costs.
IAS 23 Borrowing Costs identifies those rare cases where borrowing costs are included in the cost of inventories.
An entity may purchase inventories on deferred settlement terms. When the arrangement effectively contains a financing element, that element, for example a difference between the purchase price for normal credit terms and the amount paid, is recognized as interest expense over the period of the financing.
An entity may acquire inventories on a deferred basis. If the arrangement actually contains a financing element, the difference between the purchase price under the ordinary trade credit terms and the amount paid is recognized as interest expense over the financing period.
Cost of inventories of a service provider
Service Provider Inventory Cost
Excluded.
Cost of agricultural produce harvested from biological assets
Cost of harvested agricultural products derived from biological assets
In accordance with IAS 41 Agriculture inventories comprising agricultural produce that an entity has harvested from its biological assets are measured on initial recognition at their fair value less costs to sell at the point of harvest. This is the cost of the inventories at that date for application of this Standard.
In accordance with IAS 41 Agriculture, inventories consisting of harvested agricultural produce that an entity has obtained from its biological assets are measured on initial recognition at fair value at the time of harvest less costs to sell. This is the cost of inventories at that date for the application of this Standard.
Techniques for the measurement of cost
Cost estimation methods
Techniques for the measurement of the cost of inventories, such as the standard cost method or the retail method, may be used for convenience if the results approximate cost. Standard costs take into account normal levels of materials and supplies, labor, efficiency and capacity utilization. They are regularly reviewed and, if necessary, revised in the light of current conditions.
For convenience, inventory valuation techniques such as standard cost accounting or retail price accounting may be used if the results of their application approximate the value of the cost price. Standard costs take into account normal levels of consumption of raw materials and supplies, labor, efficiency and productivity. They are regularly reviewed and revised, if necessary, taking into account current conditions.
The retail method is 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. The percentage used takes into consideration inventory that has been marked down to below its original selling price. An average percentage for each retail department is often used.
The retail pricing method is often used in the retail industry to value inventories consisting of a large number of rapidly changing items with the same rate of return for which it is impracticable to use other costing methods. The unit cost of an inventory is determined by decreasing the selling price of that unit of inventory by an appropriate percentage of the gross margin. The percentage used is based on inventories that have been reduced in value below their original selling price. The average percentage for each retail department is often used.
Cost formulas
Costing 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.
The cost of items of inventory that are not normally fungible, as well as goods or services produced and allocated for specific projects, should be determined at the cost of each unit.
Specific identification of cost means that specific costs are attributed to identified items of inventory. This is the appropriate treatment for items that are segregated for a specific project, regardless of whether they have been bought or produced. However, specific identification of costs is inappropriate when there are large numbers of items of inventory that are ordinarily interchangeable. In such circumstances, the method of selecting those items that remain in inventories could be used to obtain predetermined effects on profit or loss.
The cost per unit method assumes that the costs incurred are attributed to designated inventory units. This treatment is appropriate for project-specific units, whether purchased or produced. However, calculating the cost of each unit is inappropriate in cases where there are a large number of inventory items that are usually interchangeable. In such cases, a method of selecting those items that remain in inventory could be used to obtain a predetermined effect on profit or loss.
The cost of inventories, other than those dealt with in paragraph 23, shall be assigned by using the 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.
The cost of inventories, other than those dealt with in paragraph 23, shall be determined using the first-in-first-out (FIFO) or weighted average cost. An entity shall use the same costing formula for all inventories that have similar properties and uses to the entity. For inventories with dissimilar properties or patterns of use, different costing formulas may be justified.
For example, inventories used in one operating segment may have a use to the entity different from the same type of inventories used in another operating segment. However, a difference in geographical location of inventories (or in the respective tax rules), by itself, is not sufficient to justify the use of different cost formulas.
For example, inventory used in one operating segment may be used by an entity differently from similar inventory in another operating segment. However, the difference in the geographic location of the inventory (or in the applicable tax rules) is not, in itself, a sufficient basis for the use of different costing formulas.
The FIFO formula assumes that the items of inventory that were purchased or produced first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average may be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances of the entity.
The FIFO formula assumes that those items that were bought or produced first will be sold first and that, accordingly, those items that remain in inventory at the end of the period were bought or produced last. According to the weighted average cost formula, the cost of each item is determined based on the weighted average of the cost of similar items at the beginning of the period and the cost of similar items purchased or produced during the period. The average value can be calculated on a periodic basis or upon receipt of each new batch, depending on the specifics of the organization's activities.
Net realisable value
Net Possible Selling Price
The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. The cost of inventories may also not be recoverable if the estimated costs of completion or the estimated costs to be incurred to make the sale have increased. The practice of writing inventories down below cost to net realisable value is consistent with the view that assets should not be carried in excess of amounts expected to be realized from their sale or use.
The cost of inventory may not be recoverable if it is damaged, obsolete or partially obsolete, or if its selling price is reduced. The cost of inventories may also be non-recoverable if the estimated cost to complete production or the estimated cost to sell increases. The practice of writing off inventories below cost to their net realizable value is consistent with the principle that assets should not be carried at a cost in excess of the amount expected to be obtained from their sale or use.
Inventories are usually written down to net realisable value item by item. In some circumstances, however, it may be appropriate to group similar or related items. This may be the case with items of inventory relating to the same product line that have similar purposes or end uses, are produced and marketed in the same geographical area, and cannot be practicably evaluated separately from other items in that product line. It is not appropriate to write inventories down on the basis of a classification of inventory, for example, finished goods, or all the inventories in a particular operating segment.
Inventories are generally written down to net realizable value per item. However, in some cases it may be appropriate to group together similar or related inventory items. This can happen with inventory items belonging to the same assortment, having the same intended use or end use, produced and sold in the same geographic area, and which are impracticable to be valued separately from other items in the same assortment. The wrong approach is to write off inventories based on their classification, for example, write off finished goods or write off all inventories in a particular industry or geographic segment.
Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made, of the amount the inventories are expected to realise. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period.
Estimates of net realizable value are based on the best available evidence of the amount available from sales of inventories at the time those estimates are made. These estimates take into account price or cost fluctuations directly attributable to events that occurred after the end of the period, to the extent that such events confirm conditions that existed at the end of that period.
Estimates of net realisable value also take into consideration the purpose for which the inventory is held. For example, the net realisable value of the quantity of inventory held to satisfy firm sales or service contracts is based on the contract price. If the sales contracts are for less than the inventory quantities held, the net realisable value of the excess is based on general selling prices. Provisions may arise from firm sales contracts in excess of inventory quantities held or from firm purchase contracts. Such provisions are dealt with under IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Estimates of net realizable value (net realizable value) also take into account the intended use of the stock on hand. For example, the net realizable value of the inventory that is intended to fulfill contracts for the sale of goods or the provision of services at fixed prices is determined based on the price specified in those contracts. If the amount of inventory available to fulfill sales contracts is less than the total amount of the underlying inventory, then the net realizable selling price of the surplus is determined based on the total selling prices. In the case of an excess of inventories under contracts for the sale of goods at fixed prices over the volume of available inventories or in the case of contracts for the purchase of inventories at fixed prices, provisions may arise. Such provisions are the subject of IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
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.
Raw materials and other materials intended for use in the production of inventories are not written off to a level below cost if the finished product, of which they will be included, is expected to be sold at a price corresponding to or above cost. However, if a decrease in the price of a raw material indicates that the cost of finished goods is higher than its net realizable value, the raw material is written off to its net realizable value. In such cases, the cost of replacing the raw material may be the best available estimate of its net realizable value.
A new assessment is made of net realisable value in each subsequent period. When the circumstances that previously caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase in net realisable value because of changed economic circumstances, the amount of the write-down is reversed (ie the reversal is limited to the amount of the original write-down) so that the new carrying amount is the lower of the cost and the revised net realisable value. This occurs, for example, when an item of inventory that is carried at net realisable value, because its selling price has declined, is still on hand in a subsequent period and its selling price has increased.
In each subsequent period, the NPV analysis is performed anew. If the circumstances that made it necessary to write off inventories below cost cease to exist or there is clear evidence of an increase in net realizable price due to changed economic conditions, the amount previously written off is reversed (i.e., the recovery is made up to the amount of the original write-down) so that the new carrying amount was the lower of cost or revised net realizable value. This is the case, for example, when an item of inventory that is carried at net realizable value due to an earlier decline in the selling price is still in inventory in a subsequent period and its selling price has increased.
Recognition as an expense
Recognition as an expense
When inventories are sold, the carrying amount of those inventories shall be recognized as an expense in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realisable value and all losses of inventories shall be recognized 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 recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs.
When inventories are sold, the carrying amount of those inventories shall be recognized as an expense in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value and any loss of inventories should be recognized as an expense in the period in which the write-off or loss occurred. The amount of any reversal of an earlier write-down of inventories due to an increase in net realizable value should be recognized as a decrease in the amount of inventories recognized as an expense in the period in which the reversal occurred.
Information about the carrying amounts held in different classifications of inventories and the extent of the changes in these assets is useful to financial statement users. Common classifications of inventories are merchandise, production supplies, materials, work in progress and finished goods.
Information about the carrying amount by type of inventory and the magnitude of changes in those assets is useful to users of financial statements. As a rule, stocks are divided into the following types: goods, raw materials, materials, work in progress and finished goods.
The amount of inventories recognized as an expense during the period, which is often referred to as cost of sales, consists of those costs previously included in the measurement of inventory that has now been sold and unallocated production overheads and abnormal amounts of production costs of inventories ... The circumstances of the entity may also warrant the inclusion of other amounts, such as distribution costs.
The amount of inventory recognized as an expense during the period, often referred to as cost of sales, consists of those costs previously included in the estimate of inventory already sold, as well as unallocated production overheads and excess production costs of inventory. The specifics of the organization's activities may also require the inclusion of other amounts, such as the cost of marketing a product.
Some entities adopt a format for profit or loss that results in amounts being disclosed other than the cost of inventories recognized as an expense during the period. Under this format, an entity presents an analysis of expenses using a classification based on the nature of expenses. In this case, the entity discloses the costs recognized as an expense for raw materials and consumables, labor costs and other costs together with the amount of the net change in inventories for the period.
Some entities use a profit and loss statement format that provides for disclosures other than the cost of inventories recognized as an expense during the reporting period. Under this format, an entity presents an analysis of costs using a classification based on the nature of the costs. In this case, the entity discloses information about the costs recognized as an expense for raw materials and consumables, labor and other costs, together with the amount of the net change in inventory balances for the period.
IFRS 15 Revenue from Contracts with Customers, issued in May 2014, amended paragraphs 2, 8, 29 and 37 and deleted paragraph 19. An entity shall apply those amendments when it applies IFRS 15.
IFRS 15 Revenue from Contracts with Customers, issued in May 2014, amended paragraphs 2, 8, 29 and 37. An entity shall apply those changes when it applies IFRS 15.
IFRS 9, as issued in July 2014, amended paragraphs 2 and deleted paragraphs 40A, 40B and 40D. An entity shall apply those amendments when it applies IFRS 9.
IFRS 9, issued in July 2014, amended paragraph 2 and deleted paragraphs 40A, 40B and 40D. An entity shall apply those amendments at the same time it applies IFRS 9.
IFRS 16 Leases, issued in January 2016, amended paragraph 12. An entity shall apply that amendment when it applies IFRS 16.
Appendix N 2
to the order of the Ministry of Finance
Russian Federation
dated 28.12.2015 N 217н
INTERNATIONAL FINANCIAL REPORTING STANDARD (IAS) 2
"RESERVES"
(as amended by IFRS 9, IFRS 15, approved by Order of the Ministry of Finance of Russia dated June 27, 2016 N 98n,
IFRS 16 approved By order of the Ministry of Finance of Russia
from 11.07.2016 N 111н)
1 The objective of this Standard is to prescribe the accounting treatment for inventories. The main issue in accounting for inventories is to determine the amount of costs that is recognized as an asset and carried forward until the corresponding revenue is recognized. This Standard provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value. It also provides guidance on the costing formulas that are used to allocate costs to inventory.
Scope of application
2 This Standard applies to all inventories except the following:
(a) excluded. - IFRS 15, approved. By order of the Ministry of Finance of Russia dated June 27, 2016 N 98n;
(b) financial instruments (see IAS 32 Financial Instruments: Presentation and IFRS 9 Financial Instruments); and
(clause "b" as amended by IFRS 9, approved by Order of the Ministry of Finance of Russia dated June 27, 2016 N 98n)
(c) biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41 Agriculture).
3 This Standard does not apply to the measurement of reserves held by:
(a) producers of agricultural and forestry products, post-harvest agricultural products, and minerals and processed minerals, provided they are measured at their net realizable value in accordance with accepted accounting practices in those industries. If such inventories are measured at their net realizable value, changes in that price are recognized in profit or loss in the period in which the changes occurred;
(b) commodity broker-traders who measure their inventories at fair value less costs to sell. If such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognized in profit or loss in the period in which the changes occur.
4 The inventories referred to in paragraph 3 (a) are measured at net realizable value at specified stages of production. This occurs, for example, when agricultural produce is harvested or minerals are mined and their sale is guaranteed by a forward contract or government guarantee, or when there is an active market and the risk of not securing a sale is negligible. Only the measurement requirements of this International Standard do not apply to such inventories.
5 Broker-traders are persons who buy or sell goods on behalf of others or at their own expense. The inventories referred to in paragraph 3 (b) are principally acquired with the intent to sell in the foreseeable future and to profit from fluctuations in price or from broker-trader's margin. If such inventories are measured at fair value less costs to sell, then only the measurement requirements of this Standard are excluded.
Definitions
6 The following terms are used in this Standard with the meanings specified:
Stocks - assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of raw materials or materials that will be consumed in the process of production or provision of services.
Net realizable price is the estimated selling price in the ordinary course of business less the estimated costs of completion of production and the estimated costs to be incurred to sell.
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 (see IFRS 13 Fair Value Measurement).
7 Net realizable value refers to the net amount that the entity expects to receive from the sale of inventory in the normal course of business. Fair value reflects the price of such inventory that would be in an orderly transaction to sell the same inventory in the primary (or most advantageous) market between market participants at the measurement date. The former is organization-specific cost, the latter is not. The net realizable value of the inventory may differ from its fair value less costs to sell.
8 Inventory also includes goods purchased and held for resale, including, for example, goods purchased by a retailer and held for resale, or land and other property held for resale. Inventories also include the finished goods or work in progress of the organization, including raw materials and materials intended for use in the production process. Costs incurred to complete a contract with a customer that do not give rise to inventories (or assets within the scope of another standard) are accounted for in accordance with IFRS 15 Revenue from Contracts with Customers.
(Clause 8 as amended by IFRS 15, approved by Order of the Ministry of Finance of Russia dated June 27, 2016 N 98n)
Estimation of reserves
9 Inventories should be measured at the lower of cost or net realizable value.
Cost of inventory
10 The cost of inventory shall include all acquisition costs, processing costs and other costs incurred to maintain the current location and condition of the inventory.
Acquisition costs
11 The cost of acquiring inventory includes the purchase price, import duties and other taxes (excluding those that are subsequently reimbursed to organizations by the tax authorities), as well as costs of transportation, handling and other costs directly related to the acquisition of finished goods, materials and services. Trade discounts, rebates and other similar items are deductible in determining acquisition costs.
Processing costs
12 Inventory processing costs include costs, such as direct labor costs, that are directly related to the production of a product. They also include systematically allocated fixed and variable production overheads arising from the conversion of raw materials into finished goods. Fixed production overhead costs are indirect production costs that remain relatively constant regardless of production volume, such as depreciation and maintenance of production buildings, equipment and right-of-use assets that are used in the production process, and management and administrative costs associated with production. Variable production overheads are indirect production costs that are directly or almost directly related to the volume of production, such as indirect costs of raw materials or indirect costs of labor.
(as amended by IFRS 16, approved by Order of the Ministry of Finance of Russia dated July 11, 2016 N 111н)
13 The allocation of fixed production overheads to processing costs is based on normal capacity utilization. Normal utilization is the amount of production that is expected to be achieved based on averages over a number of periods or seasons of normal operation, taking into account productivity losses due to scheduled maintenance. Actual production can only be used if it approximates normal production. The amount of fixed overheads attributed to each product does not increase as a result of low production or downtime. Unallocated overheads are recognized as an expense in the period in which they are incurred. During periods of unusually high levels of production, the amount of fixed overheads attributed to each unit of output is reduced so that inventory is not valued above cost. Variable production overheads are allocated per unit of production based on actual capacity utilization.
14 More than one product can be produced at the same time in a manufacturing process. This occurs, for example, in the production of co-products or a main product and a by-product. If the processing costs for each product cannot be identified separately, they are allocated to the products on a prorated and consistent basis. For example, distribution can be based on the relative sales value of each product, either at a stage in the manufacturing process when the products become individually identifiable, or at the end of production. Most by-products are inherently non-essential. In such cases, they are often measured at their net realizable value, which is deducted from the cost of the main product. As a consequence, the book value of the main product does not differ significantly from its cost price.
Other costs
15 Other costs are included in the cost of inventory only to the extent that they are incurred to support the current location and condition of the inventory. For example, it might be appropriate to include non-manufacturing overheads or customer-specific product development costs in the cost of inventory.
16 Examples of costs not included in the cost of inventories and recognized as an expense in the period in which they are incurred are:
(a) excess loss of raw materials, labor expended or other production costs;
(b) storage costs, unless they are required in the production process to proceed to the next stage of production;
(c) administrative overheads that do not help maintain the current location and status of stocks; and
(d) costs of sale.
17 IAS 23 Borrowing Costs identifies those rare cases where borrowing costs are included in the cost of inventories.
18 An entity may acquire inventories on a deferred basis. If the arrangement actually contains a financing element, the difference between the purchase price under the ordinary trade credit terms and the amount paid is recognized as interest expense over the financing period.
Service Provider Inventory Cost
19 Deleted. - IFRS 15, approved. By order of the Ministry of Finance of Russia dated June 27, 2016 N 98n.
Cost of harvested agricultural products derived from biological assets
20 In accordance with IAS 41 Agriculture, inventories consisting of harvested agricultural produce that an entity obtains from its biological assets are measured on initial recognition at fair value at the time of harvest less costs to sell. This is the cost of inventories at that date for the application of this Standard.
Cost estimation methods
21 For convenience, inventory valuation techniques such as standard cost accounting or retail price accounting may be used if the results approximate cost. Standard costs take into account normal levels of consumption of raw materials and supplies, labor, efficiency and productivity. They are regularly reviewed and revised, if necessary, taking into account current conditions.
22 The retail price method is often used in retail trade to estimate inventories consisting of a large number of rapidly changing items with the same rate of return for which it is impracticable to use other costing methods. The unit cost of an inventory is determined by decreasing the selling price of that unit of inventory by an appropriate percentage of the gross margin. The percentage used is based on inventories that have been reduced in value below their original selling price. The average percentage for each retail department is often used.
Costing formulas
23 The cost of items of inventories that are not normally fungible, and of goods or services produced and allocated for specific projects, shall be determined at the cost of each unit.
24 The cost per unit method assumes that the costs incurred are attributed to specified items of inventory. This treatment is appropriate for project-specific units, whether purchased or produced. However, calculating the cost of each unit is inappropriate in cases where there are a large number of inventory items that are usually interchangeable. In such cases, a method of selecting those items that remain in inventory could be used to obtain a predetermined effect on profit or loss.
25 The cost of inventories, other than those dealt with in paragraph 23, shall be determined using first-in-first-out (FIFO) or weighted average cost. An entity shall use the same costing formula for all inventories that have similar properties and uses to the entity. For inventories with dissimilar properties or patterns of use, different costing formulas may be justified.
26 For example, inventory used in one operating segment may be used by an entity differently from similar inventory in another operating segment. However, the difference in the geographic location of the inventory (or in the applicable tax rules) is not, in itself, a sufficient basis for the use of different costing formulas.
27 The FIFO formula assumes that those items of inventory that are bought or produced first will be sold first and that, accordingly, those items that remain in inventory at the end of the period were bought or produced last. According to the weighted average cost formula, the cost of each item is determined based on the weighted average of the cost of similar items at the beginning of the period and the cost of similar items purchased or produced during the period. The average value can be calculated on a periodic basis or upon receipt of each new batch, depending on the specifics of the organization's activities.
Net Possible Selling Price
28 The cost of inventory may be non-recoverable if it is damaged, obsolete or partially obsolete, or if its selling price is reduced. The cost of inventories may also be non-recoverable if the estimated cost to complete production or the estimated cost to sell increases. The practice of writing off inventories below cost to their net realizable value is consistent with the principle that assets should not be carried at a cost in excess of the amount expected to be obtained from their sale or use.
29 Inventories are generally written down to net realizable value per item. However, in some cases it may be appropriate to group together similar or related inventory items. This can happen with inventory items belonging to the same assortment, having the same intended use or end use, produced and sold in the same geographic area, and which are impracticable to be valued separately from other items in the same assortment. The wrong approach is to write off inventories based on their classification, for example, write off finished goods or write off all inventories in a particular industry or geographic segment.
30 Estimates of net realizable value are based on the best available evidence of the amount available from sales of inventories when those estimates are made. These estimates take into account price or cost fluctuations directly attributable to events that occurred after the end of the period, to the extent that such events confirm conditions that existed at the end of that period.
31 Estimates of net realizable value (net realizable value) also take into account the intended use of stock held. For example, the net realizable value of the inventory that is intended to fulfill contracts for the sale of goods or the provision of services at fixed prices is determined based on the price specified in those contracts. If the amount of inventory available to fulfill sales contracts is less than the total amount of the underlying inventory, then the net realizable selling price of the surplus is determined based on the total selling prices. In the case of an excess of inventories under contracts for the sale of goods at fixed prices over the volume of available inventories or in the case of contracts for the purchase of inventories at fixed prices, provisions may arise. Such provisions are the subject of IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
32 Raw materials and other materials intended for use in the production of inventories are not written off to a level below cost if the finished goods, of which they will be included, are expected to be sold at a price corresponding to or above cost. However, if a decrease in the price of a raw material indicates that the cost of finished goods is higher than its net realizable value, the raw material is written off to its net realizable value. In such cases, the cost of replacing the raw material may be the best available estimate of its net realizable value.
33 In each subsequent period, the NPL analysis is performed anew. If the circumstances that made it necessary to write off inventories below cost cease to exist or there is clear evidence of an increase in net realizable price due to changed economic conditions, the amount previously written off is reversed (i.e., the recovery is made up to the amount of the original write-down) so that the new carrying amount was the lower of cost or revised net realizable value. This is the case, for example, when an item of inventory that is carried at net realizable value due to an earlier decline in the selling price is still in inventory in a subsequent period and its selling price has increased.
Recognition as an expense
34 When inventories are sold, the carrying amount of those inventories shall be recognized as an expense in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value and any loss of inventories should be recognized as an expense in the period in which the write-off or loss occurred. The amount of any reversal of an earlier write-down of inventories due to an increase in net realizable value should be recognized as a decrease in the amount of inventories recognized as an expense in the period in which the reversal occurred.
35 Certain inventories may be allocated to other asset accounts, for example, inventories used as a component of self-constructed property, plant and equipment. Inventories allocated to other assets are recognized as an expense over the useful life of the related asset.
Information disclosure
36 The financial statements shall disclose:
(a) principles accounting policies adopted for the valuation of inventories, including the used formula for calculating the cost price;
(b) the total carrying amount of inventories and the carrying amount of inventories by type used by the entity;
(c) the carrying amount of inventories carried at fair value less costs to sell;
(d) the amount of inventories recognized as an expense during the reporting period;
(e) the amount of any write-down of the value of inventories recognized as an expense in reporting period in accordance with paragraph 34;
(f) the amount of any reversal of the write-down that was recognized as a deduction from inventories recognized as an expense in the period in accordance with paragraph 34;
(g) circumstances or events that led to the reversal of the write-down of inventories in accordance with paragraph 34; and
(h) the carrying amount of inventories pledged as security for liabilities.
37 Information about the carrying amount by type of inventory and the magnitude of changes in those assets is useful to users of financial statements. As a rule, stocks are divided into the following types: goods, raw materials, materials, work in progress and finished goods.
(as amended by IFRS 15, approved by Order of the Ministry of Finance of Russia dated June 27, 2016 N 98n)
38 The amount of inventories recognized as an expense during the period, often referred to as cost of sales, consists of those costs previously included in the estimate of inventories already sold, as well as unallocated production overheads and excess production costs of inventories. The specifics of the organization's activities may also require the inclusion of other amounts, such as the cost of marketing a product.
39 Some entities use a profit and loss statement format that discloses amounts other than the cost of inventories recognized as an expense during the reporting period. Under this format, an entity presents an analysis of costs using a classification based on the nature of the costs. In this case, the entity discloses information about the costs recognized as an expense for raw materials and consumables, labor and other costs, together with the amount of the net change in inventory balances for the period.
Effective date
40 An entity shall apply this Standard for annual periods beginning on or after 1 January 2005. Early adoption is encouraged. If an entity applies this Standard for a period beginning before January 1, 2005, it shall disclose that fact.
40A [This paragraph refers to amendments that are not yet effective and are therefore not included in this edition.]
40B Deleted.
40C IFRS 13, issued in May 2011, amended the definition of fair value in paragraph 6 and paragraph 7. An entity shall apply those amendments when it applies IFRS 13.
40D Deleted. - IFRS 9, approved By order of the Ministry of Finance of Russia dated June 27, 2016 N 98n.
40E IFRS 15 Revenue from Contracts with Customers, issued in May 2014, amended paragraphs 2, 8, 29 and 37. An entity shall apply those changes when it applies IFRS 15.
(Clause 40E was introduced by IFRS 15, approved by Order of the Ministry of Finance of Russia dated June 27, 2016 N 98n)
40F IFRS 9, issued in July 2014, amended paragraph 2 and deleted paragraphs 40A, 40B and 40D. An entity shall apply those amendments at the same time it applies IFRS 9.
(Clause 40F was introduced by IFRS 9, approved by Order of the Ministry of Finance of Russia dated June 27, 2016 N 98n)
40G IFRS 16 Leases, issued in January 2016, amended paragraph 12. An entity shall apply those amendments when it applies IFRS 16.
(Clause 40F was introduced by IFRS 16, approved by Order of the Ministry of Finance of Russia dated July 11, 2016 N 111н)
Termination of other documents
41 This Standard supersedes IAS 2 Inventories (as revised in 1993).