Ind AS 2 Inventories: Recognition as an Expense, Disclosures and Comparison with IAS 2

Understand Recognition as an Expense, Disclosures and Comparison with IAS 2

Key rules to remember

Expense on sale

Expense = carrying amount of inventories sold, recognised in the period the related revenue is recognised

Matching principle. Carrying amount means cost, or NRV if lower, at the date of sale.

Write-down

Write-down = cost − NRV (where NRV < cost), per item or group of similar items

Charge to expense in the period of write-down. Any inventory loss is also expensed in the period it occurs.

Reversal of write-down

Reversal ≤ original write-down; new carrying amount = lower of cost and revised NRV

Allowed only when NRV increases. Credit it as a reduction in inventories expense in the period of reversal.

Inventories recognised as expense (para 36(d) figure)

Carrying amount of inventories sold + write-downs − reversals

Para 36(d) discloses the amount of inventories recognised as an expense during the period (cost of sales). Abnormal production costs and unallocated production overheads are excluded from inventory cost by para 16 and are expensed in the period incurred. Para 38 allows such other amounts to be included in the total expense recognised, but they are not part of this figure.

Required disclosures

(a) accounting policies, including the cost formula; (b) total carrying amount, in classifications appropriate to the entity; (c) carrying amount of inventories carried at fair value less costs to sell; (d) amount of inventories recognised as an expense during the period; (e) amount of any write-down recognised as an expense; (f) amount of any reversal of a write-down, recognised as a reduction in the expense; (g) circumstances or events that led to the reversal; (h) carrying amount of inventories pledged as security for liabilities

These are the para 36 disclosures, items (a) to (h), in the order of the standard. Para 36(c) covers inventories carried at fair value less costs to sell. Commodity broker-traders are the main example, not the only one.

How to solve Recognition as an Expense, Disclosures and Comparison with IAS 2 questions

1. 1Identify the facts: units sold, units on hand, cost per unit, NRV at each reporting date, and any abnormal costs or pledged stock.
2. 2Decide what has been sold in the period. Take the cost of those units to expense, matched to the revenue.
3. 3For unsold stock, compare cost with NRV item by item (or by similar group). Write down only where NRV is lower than cost.
4. 4Check for reversal: if NRV has risen for stock still held, reverse up to the earlier write-down only. Cap the carrying amount at cost.
5. 5Identify items expensed straight away because they are excluded from inventory cost: abnormal wastage and unallocated fixed overheads. Expense them in the period under para 16. They are not part of the para 36(d) figure. Para 38 allows them to be included in the total expense recognised, for example in cost of sales where the entity presents expenses by function. Treat inventory losses as expense when they occur.
6. 6Check whether any inventory was used in a self-constructed asset. If so, move that cost to PPE and do not expense it as inventory.
7. 7Compute the para 36(d) amount: cost of inventories sold, plus write-downs, less reversals. Show abnormal costs and unallocated overheads separately as para 16 period expenses. Then list the disclosures asked for: policy and cost formula, carrying amounts, expense, write-down, reversal and why, pledged stock.
8. 8State the conclusion in provision-facts-conclusion form, citing the relevant Ind AS 2 paragraphs where you are sure of them: para 34 for the expense, para 16 for costs excluded from inventory, para 38 for the components of the expense, and para 36 for disclosures.

Quickest way: Four-line expense and disclosure check

Common mistakes in Recognition as an Expense, Disclosures and Comparison with IAS 2

• Expensing inventory when it is purchased or produced.

  Students treat all costs as period costs.

  Fix: Inventory stays an asset until sale. Expense it only when the revenue is recognised, or when it is written down or lost.

• Reversing a write-down above the original cost.

  Students look only at the higher NRV.

  Fix: Carrying amount after reversal is the lower of cost and revised NRV. The reversal cannot exceed the earlier write-down.

• Showing the reversal as other income.

  It looks like a gain.

  Fix: Ind AS 2 treats it as a reduction in the amount of inventories recognised as expense in the period of reversal.

• Leaving abnormal wastage and unallocated overheads in closing stock, or adding them into the para 36(d) amount of inventories recognised as expense.

  Students capitalise all production costs, or treat every production cost charged to profit or loss as inventories expense.

  Fix: Para 16 excludes these from inventory cost, so expense them in the period incurred. The para 36(d) figure is cost of inventories sold plus write-downs less reversals. Para 38 only allows these other amounts to be included in the total expense recognised.

• Missing the reason for reversal or pledged stock in the disclosure answer.

  Students remember only the policy and amounts.

  Fix: Use the full list: the circumstances that led to reversal, and the carrying amount pledged as security for liabilities, are both required.

• Writing down stock on the basis of replacement cost or one general percentage.

  Students ignore the NRV test.

  Fix: Compare cost and NRV for each item or group of similar items using estimates at the reporting date.

Worked examples