Inventory (IAS 2) and Agriculture (IAS 41)

1 Inventory (IAS 2)

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Inventory measured at the lower of cost and NRV

Selling price	X
Less:
Costs to complete	(X)
Costs of selling	(X)
NRV	X

Practice question

Under IAS 2 Inventories, consider the following costs of a manufacturing entity:

(1) Carriage inwards

(2) Carriage outwards

(3) Depreciation of factory plant

(4) General administrative overheads

Which costs should be included in the cost of inventory?

2 and 3 only1, 2 and 4 onlyAll four items1 and 3 only

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Example 2 – Inventory (valuation)

Neil paid $3 per unit for the raw materials of its products. To complete each unit incurred $2 per unit in direct labour.

Production overheads for the year based on normal output of 12,000 units was $72,000.

Due to industrial action only 10,000 units were produced and 1,000 units were in inventory at the end of the year.

As a result of the industrial action some units were badly stored and became damaged. It’s is estimated that 200 of the units will now only be sold for $12 each after minor repairs of $2 each

What figure for closing inventory would be shown in the Statement of Financial Position?

	$/unit
Material cost	3
Labour cost	2
Overheads (=72,000/12,000)	6
Total cost	11

NRV = $12 - $2 = $10

Total inventory valuation = (800 undamaged units x $11) + (200 damaged units x $10) = $10,800.

Example 3

A manufacturer is valuing its inventory at the reporting date and has identified the following items to be valued:

Inventory A – work in progress consists of 10 items that have cost $2,500 to produce in total. It is expected that each item will sell for $280, where direct selling costs are expected to be 5% of the selling price, and it is estimated that costs to complete would be $10 per unit.

Inventory B – the company has 1,000 units costing $10 each, where the packaging has been damaged. It will cost $2,000 to repackage all of the units allowing them to be sold at $11 each.

Inventory C – the company has produced inventory costing $7,000 that it is expecting to sell at $10,000 to one of its customers. Changes in production methods mean that the goods are cheaper to produce and will only cost $6,000 in the future.

At what amounts should the inventory be valued in the financial statements.

Inventory A @ $2,500

Cost (lower) = $2,500

NRV = ($280 - $10 – $14 (5% x $280)) x 10 units = $2,560

Inventory B @ $9,000

Cost = 1,000 x $10 = $10,000

NRV (lower) = (1,000 x $11) - $2,000 = $9,000

Inventory C @ $7,000

Cost (lower) = $7,000, ignoring the future costs of production

NRV = $10,000

2 Agriculture (IAS 41)

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IAS 41: biological asset, agricultural produce and inventory

Note:

Agricultural land is accounted for under IAS 16 Property, plant and equipment
Milk quotas are accounted for under IAS 38 Intangible assets
Grant income for agricultural activity is credited to profit or loss as soon as they are unconditionally receivable.

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