Inventories LKAS 2 Rangajewa Herath B Sc Accountancy

Inventories LKAS 2 Rangajewa Herath B. Sc. Accountancy and Financial Management(Sp. ) (Hons. ) (USJ) , Master of Business Administration -PIM(USJ) (Senior Lecturer, University of Sri Jayewardenepura)

Inventories are assets: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Measurement of Inventories shall be measured at the lower of cost and net realizable value.

Cost of Inventories The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Cost of purchase XXX Cost of conversion XXX Other costs to bring the inventory to present location and condition XXX Cost of inventories XXX

Costs of purchase �The costs of purchase of inventories comprise the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Trade discounts, rebates and other similar items are deducted in determining the costs of purchase. Rangajeewa Herath 5

Costs of Conversion �The costs of conversion of inventories include costs directly related to the units of production, such as direct labour. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Rangajeewa Herath 6

Other Costs �Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. �For example, it may be appropriate to include nonproduction overheads or the costs of designing products for specific customers in the cost of inventories. Rangajeewa Herath 7

Examples of costs excluded from the cost of inventories (a) abnormal amounts of wasted materials, labour or other production costs; (b) storage costs, unless those costs are necessary in the production process before a further production stage; (c) administrative overheads that do not contribute to bringing inventories to their present location and condition; and (d) selling costs. Rangajeewa Herath 8

Exercise 1 Tharanga Company PLC is a textile manufacturing company. Following information is relevant clothes and other materials imported during the December 2017. Purchased price (Prior to the trade discount) 450 000 � Trade Discount 10% Freight and insurance 100 000 � Import duties 150 000 � Transport charges 20 000 During the period these materials were used to manufacture garments and direct laboure cost and manufacturing overhead incurred were Rs. 150 000 and Rs. 80 000 respectively. Special design cost incurred Rs. 50 000 for a special customer order which was manufactured using these materials. These items are still available in the stores and storage cost is Rs. 75 000. General administration cost of the December was Rs. 45 000. Required: Calculate the cost of closing inventory as at 31. 12. 2017. �

Net Realizable Value (NRV) The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Exercise 2 �Lanka Company PLC. had 50 000 units of product X which was purchased at Rs. 40 each. But these items now can only be sold at Rs. 35 per unit. However 10% sales commission should be given to sales staff at the time of sale. Required: Calculate the NRV of the stock.

Exercise 3 �Lanka Company PLC. had 10 000 units of product X which are party completed. Cost incurred up to date is Rs. 150, 000. These items can be sold at Rs. 25 each once the product is completed. However a cost of Rs. 80, 000 has to be incurred to complete these products. Further, 10% sales commission should be given to sales staff at the time of sale. �Required: Calculate the NRV of the stock.

Techniques for the measurement of cost �The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs. �The cost of inventories, other than those could use specific identification, shall be assigned by using the first-in, first-out (FIFO) or weighted average cost formula. An entity shall use the same cost formula for all inventories having a similar nature and use to the entity. For inventories with a different nature or use, different cost formulas may be justified. Rangajeewa Herath 13

Recognition as an expense �When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories shall be recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs. Rangajeewa Herath 14

Events after the Reporting Period ( LKAS 10) Rangajewa Herath B. Sc. Accountancy and Financial Management(Sp. ) (Hons. ) (USJ) , Master of Business Administration -PIM(USJ)

The objective of this Standard is to prescribe: (a) when an entity should adjust its financial statements for events after the reporting period; and (b) the disclosures that an entity should give about the date when the financial statements were authorised for issue and about events after the reporting period. The Standard also requires that an entity should not prepare its financial statements on a going concern basis if events after the reporting period indicate that the going concern assumption is not appropriate.

Scope �This Standard shall be applied in the accounting for, and disclosure of, events after the reporting period.

Definitions �Events after the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue. �Two types of events can be identified:

Definitions (a) those that provide evidence of conditions that existed at the end of the reporting period (adjusting events after the reporting period); and (b) those that are indicative of conditions that arose after the reporting period (nonadjusting events after the reporting period)

Events after the reporting period Reporting Period 01/04/ 2015 Date that financial statements are authorized for issue 31/03/ 2016 30/06/ 2016 Events after the reporting period Adjusting Events Non-Adjusting Events

Adjusting events after the reporting period An entity shall adjust the amounts recognised in its financial statements to reflect adjusting events after the reporting period.

Adjusting events after the reporting period - Examples (a) the settlement after the reporting period of a court case that confirms that the entity had a present obligation at the end of the reporting period. The entity adjusts any previously recognized provision related to this court case in accordance with LKAS 37 Provisions, Contingent Liabilities and Contingent Assets or recognizes a new provision. The entity does not merely disclose a contingent liability because the settlement provides additional evidence that would be considered in accordance with paragraph 16 of LKAS 37.

Adjusting events after the reporting period - Examples (b) the receipt of information after the reporting period indicating that an asset was impaired at the end of the reporting period, or that the amount of a previously recognized impairment loss for that asset needs to be adjusted. For example: (i) the bankruptcy of a customer that occurs after the reporting period usually confirms that a loss existed at the end of the reporting period on a trade receivable and that the entity needs to adjust the carrying amount of the trade receivable; and (ii) the sale of inventories after the reporting period may give evidence about their net realizable value at the end of the reporting period.

Adjusting events after the reporting period - Examples (c) the determination after the reporting period of the cost of assets purchased, or the proceeds from assets sold, before the end of the reporting period. (d) the determination after the reporting period of the amount of profit-sharing or bonus payments, if the entity had a present legal or constructive obligation at the end of the reporting period to make such payments as a result of events before that date (see LKAS 19 Employee Benefits). (e) the discovery of fraud or errors that show that the financial statements are incorrect.

Non-adjusting events after the reporting period An entity shall not adjust the amounts recognized in its financial statements to reflect non-adjusting events after the reporting period. If non-adjusting events after the reporting period are material, nondisclosure could influence the economic decisions that users make on the basis of the financial statements. Accordingly, an entity shall disclose the following for each material category of non-adjusting event after the reporting period: (a) the nature of the event; and (b) an estimate of its financial effect, or a statement that such an

Non-adjusting events after the reporting period - Examples (a) a major business combination after the reporting period (SLFRS 3 Business Combinations requires specific disclosures in such cases) or disposing of a major subsidiary; (b) announcing a plan to discontinue an operation; (c) major purchases of assets, classification of assets as held for sale in accordance with SLFRS 5 Non-current Assets Held for Sale and Discontinued Operations, other disposals of assets, or expropriation of major assets by government; (d) the destruction of a major production plant by a fire after the reporting period; (e) announcing, or commencing the implementation of, a major restructuring (see LKAS 37);

Non-adjusting events after the reporting period - Examples If an entity declares dividends to holders of equity instruments (as defined in LKAS 32 Financial Instruments: Presentation) after the reporting period, the entity shall not recognise those dividends as a liability at the end of the reporting period.