ACCA Applied Skills · Financial Reporting

Inventories and Agriculture for ACCA Financial Reporting

Inventories (IAS 2) are measured at the lower of cost and net realisable value, using FIFO, weighted average cost or standard cost where suitable. Biological assets (IAS 41) are measured at fair value less costs to sell, with changes in profit or loss. Bearer plants are treated as property, plant and equipment under IAS 16.

What this chapter covers

This chapter covers two standards. IAS 2 Inventories deals with how you value goods held for sale, in production or as materials. IAS 41 Agriculture deals with living animals and plants and the produce picked from them. Both standards are commonly tested in short calculations.

IAS 2 is the larger part. You need to know what goes into cost, how to use the cost formulas, and when to write inventory down to net realisable value. You also need to handle year-end count adjustments, where the count date differs from the reporting date. IAS 41 is mostly about one idea: fair value less costs to sell, with the gain or loss going to profit or loss. Government grants and bearer plants are the usual twists.

The chapter links to the rest of FR in several ways. Closing inventory feeds cost of sales in the statement of profit or loss and current assets in the statement of financial position. Bearer plants connect to IAS 16, and grants connect to IAS 20. Inventory errors also appear in incomplete records and in the correction of errors. The chapter also overlaps with Audit and Assurance, where inventory counts are a standard audit topic. It suits Section A and B objective questions, and it can form part of a Section C question on the financial statements.

Inventory affects both profit and the statement of financial position, so examiners like to test it. Many questions are short calculations: apply the cost formula, compare cost with NRV, or adjust a count figure back to the year-end. Because objective questions are marked all or nothing, you must get the method exactly right. It also shows up inside longer financial statement questions, where a wrong inventory figure carries through to profit and ratios.

Inventories and agriculture: topics in the order to study them

1IAS 2 Inventories: Scope and MeasurementStart here. The lower of cost and NRV rule and the definition of cost are the base for everything else in IAS 2.
2Inventory Cost Formulas: FIFO, AWCO and Standard CostOnce you know what cost includes, you learn how to assign it to units issued and units left in inventory.
3Inventory Adjustments, Year-end Counts and DisclosuresThis applies the measurement rules to realistic exam situations, such as counts done before or after the year-end, and finishes the IAS 2 material.
4IAS 41 Agriculture: Biological Assets and ProduceMove to IAS 41 only after IAS 2 is secure, so you can see where produce stops being IAS 41 and becomes inventory under IAS 2.
5IAS 41 Government Grants and Bearer PlantsGrants on biological assets are dealt with within IAS 41, while bearer plants move out to IAS 16 and their grants to IAS 20. Both add special treatment to the basic fair value model, so learn them last.

How to prepare Inventories and agriculture

Treat this as two short blocks: IAS 2 first, then IAS 41. Practise calculations by hand, because the exam rewards accurate method more than memory of wording.

Learn the IAS 2 measurement rule: the lower of cost and net realisable value, assessed item by item or by group of similar items. Write out what is included in cost and what is excluded, such as abnormal waste, storage costs not needed in production, and selling costs.
Practise FIFO and weighted average cost on the same set of purchases and sales. Compare the answers so you see how each method moves closing inventory and cost of sales.
Do year-end count questions by working from the count date to the reporting date. For a count before the year-end, add purchases received after the count and deduct sales made after the count, using cost for the adjustment, not selling price. For a count after the year-end, do the reverse: deduct purchases and add back sales at cost.
Practise NRV cases where the selling price falls or extra costs are needed to complete the item. Always compare cost with selling price less costs to complete and sell.
Learn the IAS 41 sequence: measure a biological asset at fair value less costs to sell, take changes to profit or loss, and measure produce at the point of harvest at fair value less costs to sell. After harvest, produce is inventory under IAS 2 at that value as its cost.
Finish with grants and bearer plants. Learn that bearer plants follow IAS 16 while the produce growing on them stays under IAS 41. For grants, learn that an unconditional government grant related to a biological asset measured at fair value less costs to sell is recognised in profit or loss when it becomes receivable. A conditional grant is recognised only when the conditions are met. Grants related to bearer plants fall under IAS 20 as grants related to assets. You either deduct the grant from the carrying amount of the bearer plant or recognise it as deferred income. With the deduction method, the grant is released through a lower depreciation charge over the plant's useful life. With the deferred income method, it is released through a systematic credit to profit or loss over the useful life.
Finish with mixed objective test questions and one written question that combines inventory with other adjustments. Write out workings in a tidy layout so marks can be given for method.

Common mistakes in Inventories and agriculture

Valuing inventory at selling price instead of the lower of cost and NRV.
Fix: Always calculate cost and NRV separately, then choose the lower one. Selling price only matters through NRV.
Adjusting count-date inventory using selling prices.
Fix: Convert sales to cost using the margin or mark-up given, then adjust the count figure at cost. For a count before the year-end, add purchases received after the count and deduct sales at cost. For a count after the year-end, do the reverse: deduct purchases and add back sales at cost.
Including selling costs or abnormal waste in the cost of inventory.
Fix: Use a checklist: only costs that bring the item to its present location and condition are included. Selling costs and abnormal waste are expensed.
Mixing up FIFO and weighted average when units are issued in between purchases.
Fix: Set out a table with dates, units, unit costs and balances. Calculate each method on its own, line by line.
Forgetting costs to sell when measuring biological assets and produce.
Fix: Write the formula fair value less costs to sell every time, and subtract the costs before computing any gain or loss.
Applying IAS 41 to bearer plants.
Fix: Remember that bearer plants are treated like machinery under IAS 16, and grants related to them fall under IAS 20. Only the produce growing on them is measured under IAS 41.

Last-day revision: Inventories and agriculture

Inventory is measured at the lower of cost and net realisable value.
Cost includes purchase price, import duties and non-recoverable taxes, conversion costs and other costs of bringing inventory to its present location and condition.
Cost excludes abnormal waste, general administration costs, selling costs and storage costs not needed in the production process.
NRV = estimated selling price − estimated costs of completion − estimated costs necessary to make the sale.
FIFO assumes the oldest units are used first, so closing inventory is valued at the most recent prices.
Weighted average cost uses an average unit cost, either calculated periodically or after each purchase.
LIFO is not permitted under IAS 2.
Standard cost may be used if it is a close approximation to actual cost and is regularly reviewed.
For a count before the year-end, add purchases received after the count and deduct sales made after the count, with sales at cost. For a count after the year-end, deduct purchases and add back sales at cost made between the year-end and the count.
Inventory write-downs go to cost of sales. Reversals are limited to the amount of the original write-down, so inventory is carried at the lower of cost and the revised NRV.
Biological assets are measured at fair value less costs to sell, with gains and losses in profit or loss.
Produce is measured at fair value less costs to sell at harvest, then treated as inventory under IAS 2.
An unconditional government grant on a biological asset at fair value less costs to sell goes to profit or loss when receivable; a conditional grant only when the conditions are met. Grants related to bearer plants fall under IAS 20 as grants related to assets: with the deduction method the grant is released through a lower depreciation charge, and with the deferred income method through a systematic credit to profit or loss over the plant's useful life.
Bearer plants are accounted for under IAS 16, but the produce growing on them is within IAS 41.

Inventories and agriculture practice questions

Inventories and agriculture in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Inventories and agriculture: frequently asked questions

Which cost formulas does IAS 2 allow?

IAS 2 allows FIFO and weighted average cost for interchangeable items. Specific identification is used for items that are not interchangeable. LIFO is not allowed. Standard cost may be used as a convenient measure if it approximates actual cost.

How do I decide whether inventory needs a write-down?

Compare cost with net realisable value for each item or group of similar items. If NRV is lower, write the inventory down to NRV and charge the difference to profit or loss. If NRV later recovers, you can reverse the write-down, but only up to the amount of the original write-down. This means inventory is carried at the lower of cost and the revised NRV.

Is produce after harvest under IAS 41 or IAS 2?

Produce is measured under IAS 41 at the point of harvest, at fair value less costs to sell. After that, it is inventory under IAS 2, and that harvest-date value is its cost.

Why are bearer plants treated differently from other biological assets?

Bearer plants are used to grow produce over several periods, much like a machine. For that reason they are accounted for under IAS 16 as property, plant and equipment, and grants related to them fall under IAS 20. The produce growing on them is still measured under IAS 41.