1. Inventory – wrtie-down and write-up of inventory cost??
2. IAS 2 – Does this apply to work-in-process??
Thanks for your assistance.
1. You should write down inventory to NRV (net reasliable value) or when
the stock became obsolete. You can increase the value of inventory when
you measure your stock at standard cost/retail method and the standard
2. The IAS2 applies also to WIP, however under specific circustances you
don’t have to value WIP at all.
Background:Back in 1995 when we floated a Europepan consumer goods company we moved from German GAAP to IAS. One of the challenges was that under German GAAP the inventory valuation was weighted average cost whereas the CFO imposed (quite correctly despite internal views arguing that standard costing was for industrial companies only) standard costing not only in the management accounts reports (i.e. COGS) but also in the inventory balance sheet valuation.
In the absence of Corporate Manuals we (audit) had to write the standard costing guidelines. Our framework at the time was IAS 2 which allowed for it in financial reporting provided it approximated to actual cost. And here was out challenge, as standards had a budget exchange rate and our purchases of goods (all production was outsourced) were covered 80% at forward contract rates, the “bad” budget rate planning caused numerous variances which led to continous restatement of standards to approximate to actuals. In as much our production was outsourced for us capitalization of overheads was out of the question as this was already built into the FOB standard cost charged to us by the outsourced company. Our task was to tackle the restatement and establish reporting guidelines for price variances (reported above the line) and financial variances between forward rates and rates at the date of payment to report them below the line.
However now I need to deal with an industrial company which has its own plants, where standard costing exists but IFRS is “new” to controllers. I have 3 specific questions:
1. Has IFRS said anything else on standard costing in financial reporting other than what IAS 2 said? No
2. Does IFRS say anything about capitalization of overheads for standard costing? No
3. What examples can you give me about capitalization of overheads in standard costing ?(i.e. I can understand plant overheads but where do we draw the line? because in other places I have seen a portion being allocated only)
This is from the standard
15. 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 non-production overheads or the costs of designing products for specific customers in the cost of inventories.
16. Examples of costs excluded from the cost of inventories and recognised as expenses in the period in which they are incurred are:
(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.
17. FRS 23 Borrowing Costs identifies limited circumstances where borrowing costs are included in the cost of inventories.
Not an easy topic (because in my experience in Europe you find differences in standard costing all over the place depending on IT issues, Corporate Manual issues, as well as management account issues to identify the variances), your anwers will be much appreciated. Please be creative with your examples
Thanks in advance