Ind AS 2, Inventories (all you need to know) | Ind AS 2 Vs AS 2

Ind AS 2: Inventories constitute a major portion of current assets of an entity. A primary issue in accounting for inventories is the amount of cost to be recognised as an asset and carried forward until the related revenues are recognised.

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

Content in this Article

Scope of Ind AS 2

Ind AS 2 applies to all inventories, except work in progress arising under construction contracts, including directly related service contr acts (Ind AS 11, Construction Contracts), financial instruments (Ind AS 32, Financial Instruments: Presentation and Ind AS 109, Financial Instruments); and biological assets (i.e., living animals or plants) related to agricultural activity and agricultural produce at the point of harvest (Ind AS 41, Agriculture)

The Standard prescribes that the inventories shall be measured at  the lower  of cost and net realisable value. Cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

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. 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.

Cost of inventories of service provider

To the extent that service providers have inventories, they measure them at  the costs of their production. These costs consist primarily of the labour and other costs of personnel directly engaged in providing the service, including supervisory personnel and attributable overheads. Labour and o ther costs relating to sales and general administrative personnel are  not included  but  are recognised as expenses in the period in which they are incurred.  The   cost of inventories of a service provider does not include profit margins or non-attributable overheads that are often factored into prices charged by service providers.



Summary of Ind AS

The cost of inventories 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.

Recognition as an Expense

When inventories are sold, the carrying amount of inventories shall be recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down to net realisable value and  all losses of inventories shall be recognised as an expense  in  the  period  in which the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in  net  relisable  value, shall be recognised as  a  reduction in the amount of  inventories recognised  as an expense in the period in which the reversal occurs.

Difference Between Ind AS 2 and AS 2

AS 2 excludes the WIP of service providers from its scope.
  • IND AS 2 deals with the service WIP also. As per IND AS 2, the service WIP primarily consists of:
  • direct labour and
  • attributable overheads but excludes
  • sales overheads,
  • general admin. Overheads and
  • other non attributable overheads.
Less disclosure required as compared to IND AS 2 IND AS 2 requires more disclosures as compared to existing AS 2.
AS 2 specifies that “Inventories does not include machinery spares, which can be used only in connection with an item of fixed asset and the use of such machinery spares is expected to be irregular”, as these are to be accounted for, as per AS 10 on Property, Plant and Equipment. IND AS 2 does not contain such specific explanation, as this aspect is covered by IND AS 16.
There is no such provision in existing AS 2. IND AS 2 clarifies that when inventories are purchased in the scheme of deferred settlement, the difference between amount paid and “normal credit terms” price is to be recognised as interest expense over the period of financing.
This aspect is not covered by the existing AS 2. Ind AS 2 does not apply to measurement of inventories held by commodity broker-traders, who measure their inventories at fair value less costs to sell. It also defines the term “fair value” and also explains the difference between fair value and net realisable value.
The existing AS 2 specifically provides that the formula used in determining the cost of an item of inventory should reflect the fairest possible estimate of the actual cost incurred in bringing the items of inventory to their present location and condition. Ind AS 2 does not specifically state so but it requires the use of consistent cost formulas for all items of inventory having a similar nature and use.
AS 2 excludes from its scope producer’s inventory of:

  • ivestock,
  • agricuture and forest products,
  • minerals and mineral products to the extent they are measured at NRV in accordance with well established practices in those industries.
IND AS 2 excludes only the measurement of inventories held by such producers, although it provides guidance on measurement ofsuch inventories.

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