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Hello dear tutor
I hope that you are well
for agricultural product(such as milk) at time of harvest we must measure it @ F.V-CTS(even if it is lower than cost) based on ias 41(assume it is 5m$) and then(at year end) there may be 2 situation:
1-use this amount as cost and then apply ias 2 measurement requirements ie value it at lower of cost(NRV at harvest=in this example=5) and NRV(@ year end=in this exaple assume=6) so no change in inventories.Or 2-any changes in F.V-CTS goes to sopl ie in this example 1 goes to sopl(D:inventory 1 and C:sopl 1)
Which one is correct?
Thank you in advance
Changes in the value of inventories are automatically accounted for in the calculation of cost of sales
Where inventory is to be recognised at a figure lower than cost, the amount deducted for closing inventory in the calculation will be reduced to an amount that is below cost and thus the cost of sales figure is automatically increased.
That increase, in turn, automatically reduces the profit
Your effort at a double entry is some way off the target
Apart from anything else you have …
1) INCREASED closing inventory (D inventory) and
2) INCREASED profit for the year (C sop)
neither of which I assume you intended
All of that assumes that you proposed that the inventory figure at the year end (net of costs to sell) was lower than the value at harvest date
If value at year end is greater than at harvest date, again the higher closing figure for inventory will automatically reduce cost of sales and in turn increase the year’s profits
Ok?
Hello and thanks for your reply…
Normally stocks should be valued @ lower of NRV and cost BUT in IAS 2 it is said:
“Also, while the following are within the scope of the standard, IAS 2 DOES NOT APPLY to the measurement of inventories held by: [IAS 2.3]
producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value (above or below cost) in accordance with well-established practices in those industries. When such inventories are measured at net realisable value, changes in that value are recognised in profit or loss in the period of the changeSo I have problem with agricultural stocks…
Now my question is this:
For agricultural product which one is correct?
1-we must recognise them initially @ F.V-CTS @ harvest date and use this as cosy and then ANY change in F.V-CTS(whether increase or decrease) @ year end should be accounted for on inventory?(which at time of increase does not apply the requirements of measurement of inventories based on IAS 2)Or
2-we must recognise them initially @ F.V-CTS @ harvest date and then use this as cost and any decrease in FV-CTS should be accounted for only(based on IAS 2 requirements)?and hence we should ignore increase in F.V-CTS..In my conclusion from this part of your reply ie “If value at year end is greater than at harvest date, again the higher closing figure for inventory will automatically reduce cost of sales and in turn increase the year’s profits” the first one is correct…
I mean how IAS 2 DOES NOT APPLY to the measurement of inventories held by agricultural products?
Thank you very much again and sorry if it is a very long question..
Because the recognition of the value of agricultural inventory is NOT based on the lower of COST and net realisable value.
It is based, as you have more than once pointed out, on the FAIR VALUE less costs to sell
That’s why IAS 2 doesn’t apply to agricultural inventory!
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