ing For Inventories Frs 102 155n6e

Financial Reporting

ING FOR INVENTORIES (FRS 102)

LEARNING OUTCOMES At the end of the lesson students should be able to:  Describe the definition of inventories.  Describe the ing treatment recommended by FRS 102 for inventories.  Discuss the nature of inventories.  Explain how this should be ed for in accordance with ing standards.  Describe the ing treatment recommended by FRS 102 ing for Inventories.

BM0157-3.5-2 Financial Reporting

ing for Inventories (FRS 102)

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Definition: Inventories FRS 102 applies to all inventories except for items covered by other specific standards such as:  Work-in-progress under construction contracts (FRS 111);  Financial instruments (FRS 132 and FRS 139);  Biological assets (FRS 141) It also does not apply to measurement of inventories by:  Producers of agricultural and forest products, agricultural produce after harvesting; minerals and minerals rights, to the extent they are valued at net reliasable value;  Commodity brokers who measure inventories at fair value less cost to sell.

BM0157-3.5-2 Financial Reporting

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Definition of cost  Cost of inventories should comprise of expenditure which has been incurred in the normal course of business in bringing the product or service to its present location and condition.  Such cost overheads.

will

include

all

related

production

 Cost of purchase – purchase price including import duties, transport and handling cost and other directly attributable costs less trade discounts, rebates and subsidies BM0157-3.5-2 Financial Reporting

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Definition of cost (cont’d)  Cost of conversion • Conversion costs is cost to convert the raw materials into finished goods. • cost attributable to units of production, eg: direct labour, direct expenses and sub-contracted work. (overhead).Some of the overhead will be variable and others fixed. • Fixed production overheads – indirect costs that remain constant regardless of the level of activity. Eg: depreciation of factory building and security services; • Other overheads, if any, attributable in the particular circumstances of the business to bringing the product and service to its present location and condition. BM0157-3.5-2 Financial Reporting

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Cost of Conversion (cont’d)  Cost of conversion Example: XYZ budgets that it will manufacture 500,000 units in year 2. The budgeted fixed production overhead is estimated at RM3 million. The entity’s policy is to allocate fixed overhead based on units of production.  The pre-determined overhead allocation will be: RM3,000,000/500,000 = RM6 per unit.  In year 2 actual unit produce is only 400,000 units. The fixed overhead allocated will be RM6 x 400,000 = RM2.4 million. The RM600,000 that is not allocated and is expensed off in the income statement.  Suppose in year 3, actual production is 600,000 units and overhead incurred is RM3 million. The allocated overhead will still be RM3 million. Allocated to each unit is RM5 (RM3,000,000/600,000). Total allocated overhead is RM3 million. BM0157-3.5-2 Financial Reporting

ing for Inventories (FRS 102)

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Definition of cost – cont’d  Production overheads – overheads in respect of materials, labour or service for production, based on normal activity of business.  Replacement Cost items of stock have sometimes been stated in financial statements at estimated replacement cost where this is lower than net reliasable value.  Cost excluded from inventory cost:  Abnormal amount of wastage including labour, material and overhead;  Storage cost;  istrative cost;  Selling costs. BM0157-3.5-2 Financial Reporting

ing for Inventories (FRS 102)

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Measurement  Fundamental principle under FRS 102: Inventories are to be measured/stated at the lower of cost and net reliasable value.  FRS 102 defines net realisable value as estimated proceeds from the sale of items (estimated selling price in the ordinary course of business) less all further costs to completion and less all costs to be incurred in marketing, selling and distributing directly related to the items in question.

BM0157-3.5-2 Financial Reporting

ing for Inventories (FRS 102)

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Measurement  Example: RST has in stock 100 units of product Y which it had acquired for RM15 per unit. The stock can be sold at RM21 per unit and the selling costs is estimated at RM2 per unit. The net reliasable value of one unit is RM21 less RM2 = RM19. Cost is less than net reliasable value and so the stock will be disclosed at RM15 x 100 = RM1,500.  Suppose the stock were damaged and could be sold for RM10 each, the net reliasable value per unit will be RM8. The stock will be ed for at RM8 x 100 units = RM800. BM0157-3.5-2 Financial Reporting

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Matching Costs and Related revenues of Inventories  The cost of unsold or unconsumed inventories will have been incurred in the expectation of future revenue.  When this is not arise until a year later, it is appropriate to carry forward this this cost to be matched with the revenue when it rises.  If there is no reasonable expectation of future sufficient revenue to cover the cost incurred (result of deterioration and obsolescence or change in demand), the irrecoverable cost should be charged to revenue in the year under review.

BM0157-3.5-2 Financial Reporting

ing for Inventories (FRS 102)

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Methods of Valuation

Standard cost and retail methods cost. Specific cost for inventory items that are not interchangable. FIFO for inventory items that are interchangable. Weighted average for inventory items that are interchangable. BM0157-3.5-2 Financial Reporting

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Tutorial Questions: FRS 102 1. Give the definitions of inventories under the FRS 102. 2. What are the costs that can be included in the determination of the inventories? 3. Based on FRS 102, how should the inventories be recognized and disclosed in the financial statements? 4. Based on FRS 102, how should the inventories be measured? 5. What are some of problems faced in determining the amount at which inventories are stated in the financial statement? BM0157-3.5-2 Financial Reporting

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What we will cover next

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Cash flow statements

BM0157-3.5-2 Financial Reporting

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Question and Answer Session

Q&A BM0157-3.5-2 Financial Reporting

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Thank You

BM0157-3.5-2 Financial Reporting

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