AS 2, Valuation of Inventories
This Standard deals with the determination of value at which inventories are carried in the financial statements, including the ascertainment of cost of inventories and any write-down thereof to net realisable value.
Excluded inventories (not dealt with by AS 2)
- work in progress arising under construction contracts
- work in progress arising in the ordinary course of business of service providers
- shares, debentures and other financial instruments held as stock-in-trade
- producers’ inventories of livestock, agricultural and forest products, and mineral oils, ores and gases to the extent that they are measured at net realisable value in accordance with well-established practices in those industries
Measurement- lower of cost and net realisable value
Net realisable value
- Estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale
- Assessment to be made at each balance sheet date
Cost of Inventories
- Cost of inventories comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present condition and location.
Costs of purchase
- Purchase price excluding trade discounts, rebates, etc.
- Duties and taxes other than refundable duties and taxes
- Freight inwards
- Other expenditure directly attributable to the acquisition
Costs of conversion
- Allocation of fixed production overheads based on normal capacity
- Variable production overheads assigned to each unit of production on the basis of the actual use of production facilities
- Abnormal wastage
- Storage costs unless necessary in the production process prior to a further production stage
- Selling and Distribution costs
- Administrative overheads that do not contribute to bringing the inventories to their present location and condition
- Unallocated overheads
Exception to lower of cost and net realisable value
Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost.
- The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by specific identification of their individual costs.
- For other inventories, cost can be assigned by using the first-in, first-out (FIFO), or weighted average cost formula, whichever reflects the fairest possible approximation to the cost incurred in bringing the inventories to their present location and condition.