Indian Accounting Standard (Ind AS) 2 : Inventories

 
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Objective

1. The objective of this Standard is to prescribe the accounting treatment for inventories. 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. This Standard deals with the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value. It also deals with the cost formulas that are used to assign costs to inventories.

Scope

2. This Standard applies to all inventories, except:

(a) work in progress arising under construction contracts, including directly related service contracts (see Ind AS 11, Construction Contracts;

(b) financial instruments (see Ind AS 39, Financial Instruments: Recognition and Measurement and Ind AS 32, Financial Instruments: Presentation); and

(c) biological assets (i.e., living animals or plants) related to agricultural activity and agricultural produce at the point of harvest (See Ind AS 41, Agriculture1)

3. This Standard does not apply to the measurement of inventories held by:

(a) 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 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 change.

Footnote:

  1. Indian Accounting Standard (Ind AS) 41, Agriculture, is under formulation.

    (b) commodity broker-traders who measure their inventories at fair value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognised in profit or loss in the period of the change.

    4. The inventories referred to in paragraph 3(a) are measured at net realisable value at certain stages of production. This occurs, for example, when agricultural crops have been harvested or minerals have been extracted and sale is assured under a forward contract or a government guarantee, or when an active market exists and there is a negligible risk of failure to sell. These inventories are excluded from only the measurement requirements of this Standard.

    5. Broker-traders are those who buy or sell commodities for others or on their own account. The inventories referred to in paragraph 3(b) are principally acquired with the purpose of selling in the near future and generating a profit from fluctuations in price or broker-traders margin. When these inventories are measured at fair value less costs to sell, they are excluded from only the measurement requirements of this Standard.

    Definitions

    6. The following terms are used in this Standard with the meanings specified:

    Inventories are assets:

    (a) held for sale in the ordinary course of business;

    (b) in the process of production for such sale; or

    (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.

    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.

    Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arms length transaction.

    7. Net realisable value refers to the net amount that an entity expects to realise from the sale of inventory in the ordinary course of business. Fair value reflects the amount for which the same inventory could be exchanged between knowledgeable and willing buyers and sellers in the marketplace. The former is an entity-specific value; the latter is not. Net realisable value for inventories may not equal fair value less costs to sell.

    8. Inventories encompass goods purchased and held for resale including, for example, merchandise purchased by a retailer and held for resale, or land and other property held for resale. Inventories also encompass finished goods produced, or work in progress being produced, by the entity and include materials and supplies awaiting use in the production process. In the case of a service provider, inventories include the costs of the service, as described in paragraph 19, for which the entity has not yet recognised the related revenue (see Ind AS 18, Revenue).

    Measurement of inventories

    9. Inventories shall be measured at the lower of cost and net realisable 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...

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