International Financial Reporting Standards_guide.pdf

Chapter 16 Inventories (IAS 2) 185
■ costs of conversion;
– direct labor; and
– production overheads, including variable overheads and fixed overheads allocated
at normal production capacity; and
■ other costs, such as design and borrowing costs.
16.4.5 Cost of inventories excludes:
■ abnormal amounts of wasted materials, labor, and overheads;
■ storage costs, unless they are necessary prior to a further production process;
■ administrative overheads; and
■ selling costs.
16.4.6 NRV is the estimated selling price less the estimated costs of completion and costs
necessary to make the sale. These estimates are based on the most reliable evidence at the
time the estimates are made. The purpose for which the inventory is held should be taken
into account at the time of the estimate. Inventories are usually written down to NRV based
on the following principles:
■ Items are treated on an item-by-item basis.
■ Similar items are normally grouped together.
■ Each service is treated as a separate item.
16.5 PRESENTATION AND DISCLOSURE
The financial statements should disclose the following:
■ accounting policies adopted in measuring inventories, including the cost formulas
used;
■ total carrying amount of inventories and amount per category;
■ the amount of inventories recognized as an expense during the period, that is, cost of
sales;
■ amount of inventories carried at fair value less costs to sell;
■ amount of any write-downs and reversals of any write-downs;
■ circumstances or events that led to the reversal of a write-down; and
■ inventories pledged as security for liabilities.
16.6 FINANCIAL ANALYSIS AND INTERPRETATION
16.6.1 The accounting method used to value inventories should be selected based on the
order in which products are sold, relative to when they are put into inventory. Therefore,
whenever possible, the costs of inventories are assigned by specific identification of their
individual costs. In many cases, however, it is necessary to use a cost formula—for example,
first-in, first-out (FIFO)—that represents fairly the inventory flows. IAS 2 does not allow the
use of last-in, first-out (LIFO) because it does not faithfully represent inventory flows. The
IASB has noted that the use of LIFO is often tax driven and concluded that tax considerations
do not provide a conceptual basis for selecting an accounting treatment. The IASB does not
permit the use of an inferior accounting treatment purely because of tax considerations.
16.6.2 Analysts and managers often use ratio analysis to assess company performance and
condition.