Valuation of
Inventories-:
The objective of
this standard is to formulate the method of computation of cost of
inventories/stock, to determine the value of closing stock/ inventory at which,
the inventory is to be shown in balance sheet till its’ sale and recognition as
revenue.
Meaning-:
Inventories
are assets- held for sale in the ordinary course of business, in the process of
production for such sale; or in the form of materials or supplies to be
consumed in the production process or in the rendering of services.
Net realizable 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.
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 Ind AS 113, Fair Value Measurement.)
Applicability-:
1)
Work-in-progress arising under construction contract including directly related
to service contract (AS-7 Construction contracts).
2)
Work-in-progress arising in ordinary course of business for service providers
(Incomplete consultancy services, incomplete merchant bank activities, Medical
services in progress)
3)
Financial Instrument held as stock-in-trade (Shares, Debentures, and Bonds
etc.)Producer's inventories like livestock, agricultural and forest products,
mineral oils, ores and gases. Such inventories are valued at net realizable
value.
Non applicability:
1) Work in
progress arising under construction contracts, including directly related
service contracts. Work in progress arising in the ordinary course of business
of service providers.
2) Shares,
debentures and other financial instruments held as stock-in-trade and
3) Producer’s
inventories of livestock, agricultural and forest products, agricultural
produce after harvest, mines and other wasting Assets.
Measurement of
inventories
9 Inventories
shall be measured at the lower of cost and net realizable value.
Cost of
inventories-:
10 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.
Cost of purchase-:
Purchase price,
Duties and Taxes, Freight inward, other expenditures directly
Attributable to the acquisition.
Less -Duties and
taxes recoverable by enterprises from taxing authorities, Trade discount,
Rebate, Duty drawback, other items.
Costs of
conversion-:
Includes Direct
Costs, Fixed Production Overheads, and Variable Production overheads.
Other Direct Cost-:
Costs directly
related to the units of production, such as direct labour.
Cost Formulas-:
23. 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.
24. 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 is 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.
25. 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.
2
Indian Accounting Standard (Ind AS) 41,
Agriculture, is under formulation. Accordingly, this
Paragraph would be
effective from the date Ind AS 41, Agriculture, comes into effect.
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26. 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.
27. 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.
Net realizable value-:
28. 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
realised from their sale or use.
29. 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. Service providers generally accumulate costs in respect
of each service
for which a separate selling price is charged. Therefore, each such
service is treated
as a separate item.
30. 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.
31. 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 Ind AS 37 , Provisions, Contingent Liabilities
and Contingent
Assets.
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32. 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.
33. 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.
Recognition as an
expense
34. When
inventories are sold, the carrying amount of those inventories shall
be recognised
as an expense in the period in which the related revenue is
recognised. The
amount of any write-down of inventories to net realisable value
and all losses
of inventories shall be recognised 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 recognised
as a reduction
in the amount of inventories recognised as an expense in the
period in which
the reversal occurs.
Disclosure
36. The
financial statements shall disclose:-
(a) the
accounting policies adopted in measuring inventories,
including the
cost formula used;
(b) the total
carrying amount of inventories and the carrying
amount in
classifications appropriate to the entity;
(c) the
carrying amount of inventories carried at fair value less costs to
sell;
