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CBIZ & MHM Executive Education Series™

IAS 2: Accounting for Inventories Under IFRS Marco Pulido September 24, 2015

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About Us

• Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest* and advisory services • Over 2,900 professionals nationwide

A member of Kreston International A global network of independent accounting firms

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Before We Get Started…

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CPE Credit

This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar.

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Disclaimer

The information in this Executive Education Series course is a brief summary and may not include all

the details relevant to your situation.

Please contact your service provider to further discuss the impact on your business.

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Presenter

Marco has over 15 years of experience in public accounting working

with U.S. GAAP, IFRS and other foreign accounting standards in the U.S.,

Europe and in Latin America with Big 4 accounting firms. He has

experience with SEC filers (foreign and domestic) and private companies.

Marco is a CPA certified in California and has IFRS certifications by the

Institute of Chartered Accountants in England and Wales (ICAEW) and

the American Institute of Certified Public Accountants (AICPA). Technical

accounting expertise includes the following industries: Retail,

Distribution & Manufacturing – Professional Services –

Construction/Real Estate – Technology – Energy (Oil & Gas) –

Agriculture.

310.268.2746 • mpulido@cbiz.com

Marco Pulido, CPA MHM Shareholder

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Agenda

Principles of IAS 2

02

01

03

04

Identify Inventory Valuation Concepts

Permitted Cost Formulas

Disclosures

05 Differences and Convergence Between U.S. GAAP and IFRS

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PRINCIPLES OF IAS 2

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Scope of IAS 2

Applies to all inventory, except: Does not apply to the measurement of inventories held by:

• Work in progress arising under construction contracts (IAS 11)

• Financial instruments (IFRS 9)

• Biological assets related to agricultural activity and agricultural produce at the point of harvest (IAS 41)

• Producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realizable value in accordance with well-established practices in those industries.

• Commodity broker-traders who measure

their inventories at fair value less costs to sell.

<IAS 2.2, 3>

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Inventory

Inventories are assets that are: • Held for sale in the ordinary course of business. • In the process of production for such sale. • In the form of materials or supplies to be consumed in

the production process or in the rendering of services. <IAS 2.6>

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VALUATION OF INVENTORIES

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Valuation of Inventories

• Inventories shall be measured at the lower of cost and net realizable value (NRV).

• 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 (e.g. shipping costs).

<IAS 2.6, 9>

Net realizable value Cost

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Valuation of Inventories: Inventory Cost

• Inventory cost: The cost of inventory shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventory to its present location and condition.

• Hence, components of inventory cost can be summarized as: • Purchase costs • Production (conversion) costs • Other costs

<IAS 2.10>

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Valuation of Inventories: Purchase Costs

• Costs incurred in the acquisition of inventory, such as: • Purchase price • Import duties • Taxes • Transportation • Handling • Other costs directly attributable to acquisition

• Reduced by:

• Discounts • Rebates

<IAS 2.11>

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Exercise: Transportation Costs

Question: Can transportation costs be capitalized to the cost of inventory?

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Exercise: Transportation Costs

Question: Can transportation costs be capitalized to the cost of inventory?

Response: • Yes, transportation costs incurred directly or indirectly, that are necessary to

bring inventory to their present location and condition. < IAS 2.10 >

• Transportation costs that may be included:

• Supplier transportation costs and costs paid directly by buyer • Transportation costs incurred during the production process • Transportation costs from storage to point of sale

• However, transportation costs from one point of sale to another point of sale

may not be capitalized.

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Exercise: Rebates and Discounts

Background: An entity receives a 10% discount on inventory purchases that are paid within 30 days of purchase. Question: Should the entity recognize a discount for early payments?

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Exercise: Rebates and Discounts

Background: An entity receives a 10% discount on inventory purchases that are paid within 30 days of purchase. Question: Should the entity recognize a discount for early payments?

Response: Yes. IAS 2.11 notes: “Trade discounts, rebates and other similar items are deducted in determining the costs of purchase.” An entity should estimate the discount for early payment for purposes of valuing the cost of inventory. This is congruent with accounting by the supplier under IAS 18.10, Revenues, which notes that a transaction should be valued at the fair value of the consideration to be received, considering estimated discounts and rebates.

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Valuation of Inventories: Production Costs

Include: • Direct costs - Costs directly related to the units that are produced,

e.g. direct labor • Indirect costs – Fixed production overhead costs are indirect costs of

production that remain relatively constant independent of the units produced, e.g. depreciation and building/equipment maintenance

• A systematic method for assigning direct and indirect costs to inventory is required • Indirect costs should be allocated to inventory based on normal capacity

• Actual level of production may be used if approximates normal capacity • Costs allocated per unit should not be increased during periods of low

production • Indirect costs should not be expensed to income statement.

< IAS 2.12, 13 >

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Valuation of Inventories: 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: • Non-production overhead, e.g. administrative overheads that contribute to

bringing inventory to present location and condition • Costs of designing products for specific customers (R&D is generally expensed) • Borrowing costs in limited circumstances (IAS 23).

• Costs excluded from the cost of inventories and recognized as expenses: • Abnormal amounts of wasted materials, labor or other production costs • Storage costs, unless those costs are necessary in the production process before

a further production stage • Administrative overheads that do not contribute to bringing inventories to their

present location and condition • Selling costs.

<IAS 2.15 - 16>

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Exercise: Balance Sheet Classification

Background: • Stateside Apartments Ltd. has diversified its operations to

include the purchase and sale of homes. • The company has made a significant purchase of properties, in

line with an expansion initiative. • The company expects to have these properties ready for resale

in one month.

Question: • What is the proper classification of the properties that have

been purchased and are now maintained for resale? a) Property, Plant and Equipment (IAS 16) b) Inventory (IAS 2) c) Investment Property (IAS 40)

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Exercise: Balance Sheet Classification

Question: • What is the proper classification of the properties that have been purchased and

are now maintained for resale? a) Property, Plant and Equipment (IAS 16) b) Inventory (IAS 2) c) Investment Property (IAS 40)

Response: • b) Inventory. The properties should be classified inventory in accordance with IAS 2.

• The properties are maintained with the purpose of resale during the normal course

of business, hence, the classification should be inventory.

• It is likely that properties would be classified as property, plant & equipment if properties are generating rental income, while investment property if the primary objective is long-term appreciation, and not rental income.

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COST OF SALES METHODS

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Cost Methods

• Standard costs may be used for convenience if the results approximate cost • However, adjustment to actual should be performed at end

of reporting period • Permitted valuation formulas for determining current

inventory balance and COS • First-In, First-Out (FIFO) • Weighted Average Cost

• Last-In, First-Out (LIFO) is not permitted (U.S. GAAP difference)

• For inventories with a different nature or use within an entity, different cost formulas may be justified.

<IAS 2.21, 25>

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DISCLOSURES

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Disclosures

• Accounting policies • Carrying amount of inventories by distinct classifications • Carrying amount of inventories carried at fair value less

costs to sell • Amount of inventories recognized as an expense during

the period • Write-down of inventories recognized as an expense in

the period • Reversal of write-down of inventories (U.S. GAAP

difference) • Carrying amount of inventories pledged as security for

liabilities

<IAS 2.36>

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DIFFERENCES AND CONVERGENCE BETWEEN US GAAP AND IFRS

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IFRS and US GAAP – Key Differences

IFRS US GAAP

1. Inventory costing: FIFO or weighted-average costing are permitted. The use of LIFO, however, is precluded.

2. Inventory measurement: The measurement of inventory might vary when cost is greater than market (US GAAP) or net realizable value (IFRS). This is due to different valuation methods:

Inventory is measured at the lower of cost and net realizable value.

1. Inventory costing:

LIFO, FIFO, and/or weighted-average cost are permitted. Reversal of inventory write-downs is precluded.

2. Inventory measurement: Inventory is measured at the lower of cost or market. Market is the current replacement cost; however, the replacement cost cannot be greater than the net realizable value or less than net realizable value reduced by a normal sales margin.

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IFRS and US GAAP Convergence

FASB recently issued Accounting Standards Update (ASU) No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory.

• Topic 330, Inventory, currently requires an entity to measure inventory at the lower of cost or market.

• Eliminates floor-ceiling concept currently under Topic 330, ASU 2015-11 will now require inventory to be valued as in IFRS, lower of cost or net realizable value

• Amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method

• Effective for public and private companies for fiscal years beginning after 12/31/16

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? QUESTIONS

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If You Enjoyed This Webinar…

Upcoming courses: • 10/1 & 10/8: Third Quarter Accounting and Financial Reporting Update • 10/6: Controlling and Managing Healthcare Costs - Practical Guidance to Maximize Value • 10/13 & 12/10: Revenue Recognition Update for the Technology Industry • 10/28 & 11/10: Maximizing Tax Savings for Closely Held Companies with the IC-DISC Federal

Export Tax Incentive • 10/29, 11/3 & 11/4: Eye on Washington: Quarterly Business Tax Update, Q3 2015

Recent publications: • Principal Versus Agent Changes Proposed to Revenue Recognition Standard • IRS Issues Regulations on Sec. 199 Manufacturing Deduction • FASB's New Employee Benefit Plans Reporting Simplification Rules • Changes to the Accounting for Derivatives and Other Updates at the EITF

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