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IAS 2

15 December 2008 257 views No Comment

Dear all,

Is it fair to value inventory at updated standard costs even if the inventory item was manufactured at a time when standard costs were much lower?

Regards,

Grace

Hi Divine

I experienced this issue in 1995

It is fair and possible but all depends on the control and policies you have

IAS 2 allows you to use standard cost valuation for inventory in final reporting if standards approximate to actuals. As you well say below the standards will always differ a lot to actuals particularly now (and so was the case in 1995) because of fluctuations between the USD and the Euro (i.e. standards will have been built at the budget rate in say October 2007 latest and obviously the budget rate has nothing to do now with the spot rate USD/Euro)

The solution is therefore

a) restatement to actuals when the variances are so big
b) clear definition of what to do with exchange rate variances. This is critical if you use forward contracts to cover purchases in USD then NOT all can be booked as unrealised exchange gain in the financial result, there should be a correlation between goods purchased forward contracts, this is critical and then

1. the exchange rate difference between spot rate at the time the goods enter the warehouse and the forward contract rate should be the one used to value inventory i.e. more or less COGS

2. the exchange rate difference between spot rate at the time of payment and the forward contract rate is indeed a financial gain or loss

Hope this helps

Dear,
Thanks a lot that you keep us updated and share with us valuable pieces of information.

It is requested plz guide about standard on FINANCIAL INSTRUMENTS, Its accounting treatment,disclosure and recognition.
Plz mail updated and in an easy way.
Again thanx a lot