The IAS2 Inventories Accounting Standard - Report Example

Running Head: ACCOUNTING STANDARD: IAS2 – INVENTORIES Accounting Standard: IAS2 – Inventories Submitted by: XXXXXXX Number: XXXXXX of XXXXXX Introduction: The IAS2 Inventories is a standard that has been developed with the objective of finding an accounting treatment for the inventories. The main aim of this paper is to deal with an overview of the IAS2 standard. The paper provides a detailed insight into the main objective of the Standard along with a brief overview of the history and the rationales behind the development of this standard. The paper will also detail the measurement, presentation and disclosure details of the standard. A brief comparison of the standard has also been made with that of GAAP of US. Objective of IAS2: As mentioned earlier, the main objective of the standard is to provide the method of accounting for inventories. The standard has been developed to curb the main issue of accounting of the inventories. This includes the costs that need to be recognized and to be carried forward and to relate them to the revenues which need to be recognized as well (Çürük, 2007). The standard also acts as a guide for the determination of the costs and works on the recognition of the subsequent expenses. These expenses include the net realizable value. The standards also set down the guidance to the cost formula which is used to assign costs to the inventories. History of IAS 2: As has been mentioned earlier, the main objective of the IAS2 standard is to create a set regulation on the costs of the inventories. The IAS2 inventories was first exposed in September 1974, where the issue procedure and there was a name of standard changes from ‘Valuation and Presentation of Inventories in the Context of the Historical Cost System’ to ‘Inventories’. The act was put into effect on 1sy January 1995 and has been revised on 18th December 2003. The revisions made have been put into effect on 1st January 2005. Scope of IAS2: Inventories as explained in the IAS 2 refers to and includes the assets that are held for sale in the regular course of the business and these also include finished goods and assets that are in progress, i.e. work in process and also the raw materials. This simply implies that all the goods and inventories from raw material to the finished goods classify as inventories. As explained by Deloitte in a Summary of IFRS, the IAS has been noted to exclude some of the inventories from its scope. The report also provides that there are a few of the inventories that arer excluded from the scope of IAS2. These include the inventories that are a part of thw work in process especially in the construction contracts, the instruments of finance and the agriculture related assets and the inventories that relate to the harvest (Deolitte, 2010). The report also includes that although within the IAS2 scopes, there is no form of measurement of the inventories that are held. These inventories include: agricultural producers and the produces which are a part of the harvest, the products that relate to minerals and the mineral products and products that are not net realizable. Hence for such products the changes in the value are not seen in the profits and loss and hence it is difficult to place a value for these products. Another form of products that classify here includes the commodity brokers and the dealers where it is not possible to gain a fair value for the products (Deolitte, 2010). Disclosures Required: As per the IAS 2 law, the following disclosures are required: a) The Inventory accounting policy b) The level of merchandise, work in progress, finished goods, supplies and all material, based on the entity (Gregoriou & Gaber, 2006) c) The value of the inventories at the fair values less the cost of sales. d) Amount of inventories that are written down and the inventories that classify as an expense in the period (International Financial Reporting Standards, 2008) e) Amount of the inventories that are pledged as a security to meet the liabilities f) The levels that are used as reversals for write – down to NRV and also the circumstances and the reasons for such reversals need to be disclosed Measurements of Inventories: As per the IAS 2, the costs should include cost of purchase, cost of conversions and all other costs that have incurred in the buying and storing of the inventories (Çürük, 2007). However there are a few circumstances where the IAS 23 has classified the borrowing costs and these generally have the features of the qualifying assets (Deolitte, 2010). The report from Deolitte also explains that inventory costs that should not be included, these are, a) abnormal wastes, admin charges and overheads which are not related to production, c) selling costs, d) storage costs, e) the costs in terms of interest, f) the foreign exchange differences that arise due to acquisitions of inventories that are invoiced in foreign currency. IASB and IAS2: IAS2 has been adopted by International Accounting Standards Board and there have been a number of revisions that have been made to the IAS2 based on the rules set down by the IASB. Prescribed Accounting Treatment: The IAS2 has provided a set rule for the accounting treatment and has set down that the inventories need to be measured at the lower cost ad net realizable value based on item by item. The IFRS (international Financial Reporting Standards), explains, ‘The cost of inventories is the aggregation of the costs of purchase (e.g. purchase price, import duties, transportation and handling costs) net of trade discounts and rebates, the costs of conversion into finished products (e.g. labour and production overhead costs) and other costs in bringing the inventories to their present location and condition excluding the cost of abnormal wastage, storage, administration and selling. The cost of inventories may be approximated using the standard cost method (cost of inventories estimated based on normal operating activity) or the retail inventory method (cost of inventories estimated based on reducing the sales value by the appropriate gross margin)’ (International Financial Reporting Standards, 2008). The regulation aims that the cost of inventories needs to use the First – in – first – out method of inventory systems or the weighted – average – cost formula. In the weighted average cost formula, the inventory items are assigned to a weighted average of the cost of those items on hand for the items that have been purchased from the beginning of the period to date. Other terms like the net realizable value refer to the expected realizable value during the course of the business from the sale of inventories (International Accounting Standards Committee, 2000). The amount that the entity recognizes and includes as assets in the balance sheet is the lower of costs and the net realizable value. The diagram below provides an understanding of the IAS prescribed treatment of accounting. Figure: Accounting for inventories (International Financial Reporting Standards, 2008) IAS vs. US GAAP: There is a high level of competition between the IAS and US GAAP. Both the accounting methods aim at becoming the global accounting standards and this has hence created a level of debates and discussions of the quality of the two standards. There have been a number of debates about the global uniformity in terms of the accounting standards. There have been a number of changes that have been noted over the past few years. There have been changes in the market conditions, near term convergence between the IAS and GAAP (Leuz, 2002). There have also been a number of new standards that have been issued and these standards have a direct impact on both the US as well as non US companies in a number of different manners. The standards will lead to the non US subsidiaries to use IAS2 around the world and the important aspects of US GAAP will continue to grow and converge (PriceWaterHouse Coopers, 2010). In terms of the differences of the two, in terms of the determination of the measurement date for the market price of the marketable securities, in terms of US GAAP, there is a certain data that is agreed and announced; if not the acquisition date is taken into account. Similarly in the case of IAS, this is fixed on the date of acquisition and is the day when the acquirer obtains control of the acquiree. In terms of the contingent consideration, the US GAAP recognizes it only when the contingency is resolved beyond doubt however in terms of the IAS, it is recognized when the contingency might occur and can be reliably measured. Considering the negative goodwill, the US GAAP, carries it on a prorate basis and any excess is recognized as an extraordinary gain. However, the IAS recognizes it immediately after reassessing the purchase price allocation. Discussions: The accounting standards across the world have been used to draw up the International standards security board. The International accounting Standards committee has also taken complete advantage of the standards from around the world and has been an excellent standard based on a wide variety from across the world and the standard contains elements of a variety of countries (Assurance and Advisory Business Services, 2007). In conclusion it can be clearly stated that the use of IAS2 standards helps the companies develop and maintain their inventories in an effective manner and can also help in organized and effective financial account keeping as well. References Assurance and Advisory Business Services. (2007). U.S. GAAP v. IFRS: The Basics. Retrieved March 17, 2010, from http://www2.eycom.ch/publications/items/2007_ey_us_gaap_v_ifrs_basics/2007_ey_us_gaap_v_ifrs_basics.pdf Çürük, P. D. (2007). IAS 2. International Accounting Standar d No: 2 , 1 - 8. Deolitte. (2010). IAS 2 INVENTORIES. Retrieved March 17, 2010, from Summaries of International Financial Reporting Standards: http://www.iasplus.com/standard/ias02.htm Gregoriou, G. N., & Gaber, M. (2006). International Accounting: Standards, Regulations, Financial Reporting . Butterworth-Heinemann. International Accounting Standards Committee. (2000). International Accounting Standards Explained. Wiley Publication. International Financial Reporting Standards. (2008, January 1). IAS2. Retrieved March 17, 2010, from Fact Sheet: http://www.cpaaustralia.com.au/cps/rde/xbcr/cpa-site/IAS-2-fact-sheet.pdf Leuz, C. (2002). IAS versus US GAAP: Information Asymmetry-Based Evidence from Germanys New Market. SSRN Working Paper Series . PriceWaterHouse Coopers. (2010). IFRS and US GAAP: similarities and differences: September 2009. Retrieved March 17, 2010, from http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences-september-2009.jhtml Read More