Accounting 31: Lecture Notes
PAS 2 Inventories 3. Other costs – necessary bringing the
- Provides guidance in the determination inventories to their present location and
of cost of inventories, condition.
including the use of cost formulas, and
their subsequent measurement and EXCLUDED from the cost of inventories:
recognition as expense a. Abnormal amounts of wasted materials,
labor or other production
PAS 2 applies to all inventories except: costs
Assets accounted for under other b. Storage costs of completed goods
Standards c. Administrative overheads that do not
a. Financial instruments contribute to bringing inventories to their
b. Biological assets and agricultural present location and condition
produce at the point of harvest d. Selling costs (ex. Advertisement)
Assets not measured under the lower Interest expense – if payment is deferred
of cost and net realizable value (NRV) (delayed), the difference between the
a. Inventories of producers of agricultural, purchase prices for normal credit terms and
forest, and mineral products measured at the amount paid is recognized
net realizable value
b. Inventories of commodity broker- Cost formulas/ Cost flow method/ Cost
traders measured at fair value less costs flow assumptions
to sell - Flow of costs and not necessarily to the
actual physical flow of inventories
Inventories are assets:
a. Held for sale in the ordinary course of 1. Specific identification – inventories that
business (finished goods) are not ordinarily
b. In the process of production for such interchangeable (individually unique), and
sale (work in process) that are segregated for specific projects
c. In the form of materials or supplies to *cost of sales = actual costs of the
be consumed in the production process or specific items sold
in rendering of services (raw materials and *ending inventory = actual costs of the
manufacturing supplies) specific items on hand
Ordinary course of business – the 2. First-In, First-Out (FIFO) – inventories
necessary or usual business activities in that were purchased or produced first are
an entity sold first, unsold inventories at the end of the
period are those most recently purchased or
Measurement: produced.
- lower of cost
- net realizable value (NRV) 3. Weighted average – based on the
average cost of beg inventory and all
Cost inventories purchased or produced
1. Purchase cost
a. Purchase price (net of trade Same cost formula shall be used for all
discounts and other rebates) inventories with similar nature and use.
b. Import duties
c. Non-refundable/recoverable 4. Last-In, First-Out (LIFO) – not permitted
purchase taxes
d. Transport Net Realizable Value (NRV)
e. Handling – estimated selling price in the ordinary
f. Other costs directly attributable to course of business less the estimated costs
the acquisition of the inventory of completion and estimated costs necessary
to make the sale
2. Conversion cost – costs necessary in - Net amount that an entity expects to realize
converting raw materials into finished from the sale of inventory in the ordinary
goods course of business
a. Direct labor
b. Production overhead Fair value
– the price at which an orderly transaction to
sell the same inventory in the principal
market for that inventory would take place
between market participants at the h. Carrying amount of inventories pledged as
measurement date security for liabilities
- is the amount of money you would get if
you sold the good in the current market Recap:
- the seller is not under any pressure to Periodic and Perpetual Inventory
raise cash because it presumes that in System
those circumstances the seller would be
able to get the highest price possible for
his good
The account of an inventory may
exceed its recoverable amount if the
inventory:
a. is damaged
b. becomes obsolete
c. prices have declined
d. estimated costs to complete or sell
the inventory have increased
FOB (Free on Board) Shipping Point vs.
The cost that exceeded the NRV – written FOB Destination
down (expense)
FOB Destination – the title of ownership is
If the NRV subsequently increases – transferred at the buyer’s loading dock, post
previous written down is reversed (the office box, or office building; once goods are
amount of reversal shall not exceed the delivered to the buyer’s specified location,
original write-down) the title of ownership of the goods transfers
Item by item basis – write downs of from the seller to the buyer; the seller legally
inventories owns the goods and is responsible for the
*Raw materials are not written down goods during the shipping process
below cost
FOB Shipping Point –the title and
Replacement cost – best evidence of NRV responsibility of goods transfer from the
for raw materials seller to the buyer when the goods are
placed on a delivery vehicle
Recognition as an expense
a. Carrying amount of an inventory that is
sold = expense
b. Write-down of inventories to NRV =
expense
c. Reversal of any write-down = reduction
in the amount of inventories recognized
as an expense
d. Inventories that are used in the
construction of another asset = not
expensed, capitalized as cost of the
constructed asset
Disclosures
a. Accounting policies (including cost
formula used)
b. Total carrying amount of inventories PAS 41: Agriculture
c. Carrying amount of inventories carried This Standard shall be applied to account
at fair value less costs to sell for the following when they relate to
d. Amount of inventories recognized as an agricultural activity:
expense 1. biological assets, except for bearer plants
e. Amount any write-down that is 2. agricultural produce at the point of
recognized as an expense harvest;
f. Amount of any reversal of write-down 3. government grants related to biological
g. Events that led to the reversal of a assets.
written-down of inventories
PAS 41 does not apply to the following:
1. Land related to agricultural activity (PAS 1. Capability to change
16 and PAS 40). Living animals and plants are capable of
2. Bearer plants (PAS 16). However, PAS biological transformation.
41 applies to the produce on those bearer
plants. 2. Management of change
3. Government grants related to bearer Management facilitates biological
plants (PAS 20). transformation by enhancing, or at least
4. Intangible assets related to agricultural stabilizing, conditions necessary for the
activity (PAS 38) process to takes place. For example,
harvesting from
POINT OF HARVEST unmanaged resources (such as ocean fishing
This Standard is applied to agricultural and deforestation) is not agricultural activity.
produce, which is the harvested produce
of the entity's biological assets, at the 3. Measurement of change
point of harvest. The change in quantity or quality brought
about by biological transformation or
BIOLOGICAL ASSETS harvest is measured and monitored as a
Biological assets are living animals and routine management functions.
living plants. It can be either consumable
biological assets or bearer biological BIOLOGICAL TRANSFORMATION
assets. Biological transformation comprises the
processes of growth, degeneration,
a) Consumable biological assets - production, and procreation that cause
Those that are to be harvested as qualitative or quantitative changes in a
agricultural produce or sold as biological biological asset.
assets a) Asset changes through:
1. Growth
b) Bearer biological assets - Those that An increase in quantity or improvement in
are held to bear produce. Only the quality of an animal or plant
produce is harvested while the bearer 2. Degeneration
biological asset remains. A decrease in quantity or deterioration in
quality of an animal or plant
Bearer Plant is a living plant that: 3. Procreation
a) Is used in the production or supply of Creation of additional living animal or plant.
agricultural produce
b) Is expected to bear produce for more c) Production of agricultural produce
than period; and
c) Has a remote likelihood of being sold as Initial Recognition
agricultural produce, except for incidental An entity shall recognize a biological asset or
scrap sales. agriculture produce when, and only when:
a. the entity controls the asset as a result of
past events;
b. it is probable that future economic benefits
will flow to the enterprise; and
c. the fair value or cost of the asset can be
Agriculture activity is the management measured reliably. In agricultural activity,
by an entity of the biological control may be evidenced by, for example,
transformation and harvest of biological i. legal ownership of cattle
assets for sale or for conversion into ii. branding or otherwise marking of the
agricultural produce or into additional cattle on acquisition, birth, or weaning.
biological assets.
Examples: The future benefits are normally assessed by
a) Raising livestock measuring the significant physical attributes
b) Forestry Initial and Subsequent Measurements
c) Annual or perennial cropping A. Biological asset
d) Cultivating orchards and plantations Initial recognition and subsequent reporting
e) Floriculture date – shall be measured at its fair value less
f) Aquaculture (including fish farming) costs to sell (FVLCTS) except when the fair
value cannot be measured reliably. Fait
The following are the common features of value less costs to sell is determined as
agricultural activities: follows:
B. Agricultural produce arrive at the fair value of the biological
Initial recognition (point of harvest) – shall assets.
be measured at its fair value less costs to
sell at the point of harvest. Subsequent GOVERNMENT GRANTS
measurement (after harvest) is the cost at - Only government grants related to
that date when applying PAS 2 Inventories biological assets measured at fair value less
or another applicable standard. cost to sell are accounted for under PAS 41.
- Those that are related to biological assets
An entity uses PFRS 13 Fair Value measured at cost less accumulated
Measurement when measuring the fair depreciation and accumulated impairment
value of biological assets and agricultural losses are accounted for PAS 20
produce. Contract prices are not
necessarily relevant when measuring fair Accounting for Government Grants and
value because fair value is not adjusted by Disclosure of Government Assistance.
the existence of the contract. Under the PAS 41, if the grant is:
a) Unconditional – the grant is recognized
Cost may sometimes approximate fair in profit or loss when it becomes receivable
value, particularly when: b) Conditional – the grant is recognized in
1. little biological transformation has profit or loss when the attached conditions
taken place since initial cost incurrence are met
(e.g., seedlings planted immediately prior c) Conditional but the terms of the
to the end of reporting period or newly grant allow part of it to be retained
acquired livestock) according to the time that has elapsed –
2. the impact of the biological a portion of the grant is recognized in profit
transformation on price is not expected to or loss as time passes.
be material (e.g., the initial growth in a 30
year pine tree plantation production cycle) Disclosure requirements in PAS 41
include:
Cash flows on finance costs, taxes, and 1. aggregate gain or loss from the initial
cost of reestablishing biological assets recognition of biological assets and
after harvest are not considered when agricultural produce and the change in
measuring fair value. fair value less costs to sell during the
period* [IAS 41.40]
Cost to sell (cost of disposal) include 2. description of an entity's biological
the following: assets, by broad group [IAS 41.41]
1. Commissions to brokers 3. description of the nature of an entity's
2. Levies by regulatory agencies and activities with each group of biological
commodity exchanges assets and non-financial measures or
3. Transfer duties and duties estimates of physical quantities of output
during the period and assets on hand at
Cost to sell do not include transport costs, the end of the period [IAS 41.46]
advertising costs, income taxes and 4. information about biological assets whose
interest expense. title is restricted or that are pledged as
If the location is a characteristic of the security [IAS 41.49]
biological asset, the price in the principal 5. commitments for development or
(or most acquisition of biological assets [IAS 41.49]
advantageous) market shall be adjusted 6. financial risk management strategies [IAS
for the transport costs. 41.49]
7. reconciliation of changes in the carrying
BIOLOGICAL ASSETS ATTACHED TO amount of biological assets, showing
LAND separately changes in value, purchases,
Biological assets attached to the land sales, harvesting, business combinations,
(example, trees in a plantation forest) may and foreign exchange differences* [IAS
not have a separate market but an active 41.50].
market may exist for the combined assets
(i.e., biological assets, raw land, and land ENCOURAGED DISCLOSURES
improvements) as a package. In such Disclosure of the following information is
case, the fair value of the raw land and encouraged but not required:
land improvements may be deducted from 1. Disclosure of consumable and bearer
the fair value of the combined assets to biological assets.
2. Disclosure of mature and immature
biological assets
Mature biological assets
Those that have attained harvestable
specifications (for consumable biological
assets) or are able to sustain regular
harvests (for bearer biological assets)
3. Disclosure of breakdown of total gain or
loss from changes in fair value less cost to
sell
during the period of physical change and
price change.
Price Change
Difference between prices at the
beginning and end of the period without
considering changes in price due to
physical growth of biological assets. Age
of biological asset at the end of the period
is ignored.
Physical Change
Difference between prices at the end of
the period considering the price due to
physical growth. FVLCS at the beginning of
the period is ignored
