Inventory

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1 Inventory (IAS 2)

Measure @ lower of
Cost	NRV
Costs incurred in bringing inventory to its present condition and location Materials Labour Manufacturing overheads (based on normal output)	Selling price	X
	Less:
	Costs to complete	(X)
	Costs of selling	(X)
	NRV	X

Note:

Biological assets / agricultural produce (IAS 41) is valued at fair value less costs to sell until harvested

Where a scenario hints that goods are old, slow-moving or superseded, test net realisable value rather than accepting the system’s cost figure. Estimated selling price less the costs to complete and to sell is the ceiling; where it falls below cost, both inventory and profit are overstated until the write-down is made.

Example 1 – Inventory

Bravo manufactures components for the retail industry. The inventory is currently valued at cost.

The cost structure of the equipment is as follows:

	Cost per unit $	Selling price per unit $
Production process – 1^st stage	1,000	1,050
Conversion costs – 2^nd stage	500
Finished product	1,500	1,700

The selling costs are $10 per unit and Bravo has 100,000 units at the first stage of production and 200,000 units of finished product.

Shortly after the year-end a competitor released a new model and this has resulted in Bravo having to reduce its selling price to $1,450 for the finished product and $950 for the first stage of production.

Calculate the value of closing inventory to be included in Bravo’s financial statements at the reporting date.

Example Answer 1– Inventory

	$
Selling price
Less: selling costs
NRV
Less: conversion costs
NRV (1st stage)

Write down:

		$m
Finished goods	200,000 units x (1,500 – 1,440)	12
First stage of production	100,000 units (1,000 – 940)	6