1 SCOPE of IAS-2 STOCKS

• Financial statements prepared under historical cost in accounting for inventories other than
• contract work in progress
• financial instruments
• producers’ inventories of livestock, agricultural and forest products and mineral ores.

2 DEFINITIONS

2.1 Inventories

Assets

(a) held for sale in ordinary course of business

(b) in process of production for sale

(c) materials or supplies to be consumed in production process.

2.2 Net realisable value

Estimated selling price

3 MEASUREMENT

Inventories should be measured at the lower of cost and net realisable value.

4 COST

All costs of purchase , costs of conversion and other costs involved in bringing the inventories to their present location and condition.

4.1 Components

purchase price	· direct production costs		· only if incurred in bringing inventories to present
· import duties/non-refundable taxes	· production overheads †		location and condition eg non-production overheads /specific design costs
transport/handling	fixed eg factory depreciation	variable eg indirect materials
deduct trade discounts/rebates	· joint product costs (deduct NRV of by-products)		· borrowing costs in limited circumstances

† Based on normal capacity

• Expenditure excluded

• Service providers – cost of inventories consist primarily of labour including supervisory personnel and attributable overheads.

4.2 Techniques for measurement of cost

Two costing methods can be used for convenience if results approximate actual cost.

Normal levels of materials, labour, efficiency and capacity utilisation	For inventories of large numbers of rapidly changing items with similar margins
· Regularly reviewed and revised as necessary	Reduces sales value by appropriate percentage gross margin

5 COST FORMULAS

5.1 Formulae permitted

• Specific identification of individual costs

Otherwise

First-in, first-out (FIFO) Weighted average
Last-in, first-out (LIFO)	= Allowed alternative treatment

5.2 Specific identification of individual costs

• This formula is required for
• items not ordinarily interchangeable, and
• goods/services produced and segregated for specific projects.

5.3 Inventories ordinarily interchangeable

5.3.1 Benchmark treatment

Assumes that items purchased first are sold first	Determined from weighted average cost of items at beginning of period and cost of similar items purchased/ produced during period
· Therefore inventory at period end is most recently purchased or produced.	May be calculated on a periodic basis or on each additional shipment.

5.3.2 Allowed alternative treatment

LIFO – assumes that items of inventory purchased or produced last are sold first inventory at period end is those first purchased/produced

6 NET REALISABLE VALUE

6.1 Need for

• Costs of inventories may not be recoverable due to
• damage
• obsolescence
• decline in selling price
• an increase in estimated costs to completion/to be incurred.

• Write down to NRV usually on an item by item basis.

6.2 Considerations

• Estimates of NRV take into consideration
• fluctuations of price or cost relating to events after the period end
• the purpose for which inventory is held.

6.3 Materials

• Materials for use in production are not written down to below cost unless cost of finished products will exceed NRV.

6.4 Timing

• A new assessment is made of NRV in each subsequent period. When circumstances causing write-down no longer exist, write-down is reversed.

7 RECOGNITION AS AN EXPENSE

• When inventories are sold, their carrying amount should be recognised as an expense in the period in which related revenue is recognised.
• Any write-down to NRV and all losses should be recognised in the period the write-down/loss occurs.
• Any reversal of any write-down should be recognised as a reduction in expense in the period the reversal occurs

8 DISCLOSURE

8.1 In financial statements

(a)	Accounting policies adopted in measuring inventories
(b)	Total carrying amount – in appropriate classifications
(c)	Amount of inventory carried at NRV
(d)	Any reversal of write-down recognised as income
(e)	Circumstances or events that led to reversal of a write-down
(f)	Carrying amount of inventories pledged as security for liabilities.

Illustration –Nestlé (1997)

Accounting policies

Inventories

Raw materials and purchased finished goods are valued at purchase cost. Work in progress and manufactured finished goods are valued at production cost. Production cost includes direct production costs and an appropriate proportion of production overheads and factory depreciation.

Movements in the most important raw material stock and purchased finished goods are accounted for using the FIFO (first in, first out) method. The weighted average cost method is used for other stocks.

A provision is established when the net realisable value of any inventory item is lower than the values calculated above.

Inventories amounting to Fr. 119 million (1996: Fr. 111 million) are pledged as security for financial creditors.

8.2 Using LIFO

• Disclose difference between the balance sheet amount and

8.3 Expense recognition

• Disclose for period

cost of inventories recognised as an expense	operating costs, applicable to revenues, recognised as an expense, classified by nature
measurement of inventory sold unallocated production overheads abnormal production costs	· costs recognised as an expense for · raw materials and consumables · labour costs · other operating costs · net change in inventories

• A write-down to NRV may be of such size, incidence or nature to require separate disclosure

1 SCOPE

1.1 IAS 37

• Applies to all enterprises in accounting for provisions contingent liabilities and contingent assets excluding those covered by other IASs (all of which are outside the scope of the Paper 1 syllabus) eg
• construction contracts
• income taxes
• leases
• employee benefits
• Other exceptions (eg resulting from certain financial instruments) are also outside the scope of Paper 1.

2 DEFINITIONS

2.1 Provisions

• Liabilities of uncertain timing or amount.

2.2 Liability

• A present obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits

2.3 Contingent liability

(a)	A possible obligation arising from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise, or
(b)	A present obligation arising from past events (an "obligating event") which is not recognised because (i)    an outflow of resources is not probable, or (ii)    it cannot be measured with sufficient reliability.

2.4 Contingent asset

• A possible asset arising from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events …

2.5 Events after the balance sheet date [IAS 10]

• Those events, both favourable and unfavourable, that occur between the balance sheet date and the date on which the financial statements are authorised for issue.

3 CONTINGENT LIABILITIES AND ASSETS

3.1 Provisions

3.1.1 Recognition criteria (as liabilities)

(a)     A present obligation (legal or constructive) as a result of a past event

(b)     An outflow of resources to settle the obligation is probable

(c)     A reliable estimate of the amount can be made.

3.2 Nature of "contingencies"

The fact that an estimate is involved does not of itself create the type of uncertainty which characterises a contingency.

3.3 Uncertainty

• Can be expressed by a range of outcomes.

3.4 Accounting treatment

3.4.1 Summary

Flow of resources	Obligation	Asset
Remote	No disclosure	No disclosure
Probably not/Possible	Contingent liability disclosure	No disclosure
Probable	Provision (if reliable estimate) – otherwise a contingent liability	Disclosure required
Expected/virtually certain	Provision	Asset (not contingent)

3.4.2 Disclosure

• Nature of the contingent liability/asset
• Estimate of financial effect (where practicable)
• Uncertain factors affecting amount or timing

Illustration 1– Waterford Wedgwood plc 1996

17. Contingent liabilities

Under certain circumstances, grants amounting to IR£2.2 million (1995: IR£2.0 million) could become repayable by the group.

3.5 Contingent assets

Should not be recognised.

• Existence should be disclosed if it is probable that a gain (ie economic benefits) will be realised. Disclosure must avoid giving misleading implications about the likelihood of realisation.
• When realisation is virtually certain, then not a contingency and recognition is appropriate.

3.6 Contingent liabilities

Should not be recognised.

• Disclose (unless possibility of a loss is remote).
• Recognise a provision when the loss (outflow of economic benefits) becomes probable.

3.7 Measurement

• Best estimate, eg
• as evidenced by events after the balance sheet date
• "expected value" ie weighting all possible outcomes by they probabilities (eg warranties for products sold)
• mid-point of a range
• most likely outcome.
• Separately identifiable contingencies.

Illustration 2

Substantial legal claims – factors taken into account by management in evaluating the contingency include

• progress of claim at date on which financial statements are authorised for issue
• opinions of legal experts or other advisers
• experience of the enterprise in similar cases
• experience of other enterprises in similar situations.

• For contingencies common to a group of similar transaction (eg product warranties), costs may be incurred frequently.

4 IAS 10 "EVENTS AFTER THE BALANCE SHEET DATE"

4.1 "Adjusting" (ie assets and liabilities)

4.1 "Adjusting" (ie assets and liabilities)

4.2 "Disclosing"

Providing further evidence to assist with the estimation of amounts relating to conditions existing at the balance sheet date Eg loss on a trade receivable account confirmed by bankruptcy of a customer or Indicating that the going concern assumption is not appropriate Eg management intends to liquidate the enterprise or cease trade (or has no realistic alternative but to do so.

Events of such importance that non-disclosure would affect the ability of users of financial statements to make proper evaluations and decisions Egs decline in market value of investments after balance sheet date a major acquisition of another enterprise Events in subsequent periods that represent unusual changes to the condition of assets or liabilities at the balance sheet date Eg destruction of a major production plant by a fire after the balance sheet date.

4.3 Disclosure required

(a) Nature of the event

(b) An estimate of the financial effect, or a statement that such an estimate
cannot be made.

Illustration 3 – Cadbury Schweppes 1996

31. Post balance sheet events

4.4 Authorisation of financial statements

• When (ie date) and who to be disclosed.
• Any power to amend financial statements after issuance to be disclosed.

4.5 Dividends

• Dividends in respect of the period covered by the financial statements that are proposed or declared after the balance sheet date should not be recognised as a liability.
• Dividends proposed after the balance sheet date should be presented either
• on the face of the balance sheet (as an appropriation within equity); or
• in the notes.

5 INTER-RELATIONSHIP