08/10/2024

PAS 2: INVENTORIES
RHODILET B. VALDEZ, CPA

Inventory, defined
Inventories are assets:
• Held for sale in the ordinary course
of business (finished goods);
Note: Ordinary course of business refers to the
necessary, normal, or usual business activities
of an entity.
• In the process of production for such
sale (work in process); or
• In the form of materials or supplies
to be consumed in the production
process or the rendering of services
(raw materials and manufacturing supplies)

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Exclusions from PAS 2 Inventories

(assets accounted for other standards)

• Financial instruments (PAS

32 and PFRS 9); and
• Biological assets and
agricultural produce at the
point of harvest (PAS 41)

Inventory,
recognition
• Inventories are normally
presented in a classified
statement of financial position
as current assets

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PAS 2 OBJECTIVE:
• The objective of this standard is to
prescribe the accounting treatment for
inventories.
• The primary issue in the accounting for
inventories is the determination of cost to
be recognized as asset and carried
forward until it is expensed.
• Provides guidance in the determination of
cost of inventories, including the use of
cost formulas, and their subsequent
measurement and recognition as expense.

Inventory, Measurement
Initial Measurement @ COST

• The cost of inventories comprises of all cost of purchase, cost of

conversion and other costs incurred in bringing the inventories
to their present location and condition.
• Purchase cost – this includes the purchase price (net of trade
discounts and other rebates), import duties, non-
refundable or non-recoverable purchase taxes, and
transport, handling and other costs directly attributable
to the acquisition of the inventory.
• Conversion cost – these refer to the costs necessary in
converting raw materials into finished goods. Conversion
costs include the costs of direct labor and production
overhead.

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Excluded from Cost of

Inventory
• Abnormal amounts of wasted
materials, labor, or other
production costs
• Selling costs, for example,
advertising and promotion
costs and delivery expense or
freight out
• Administrative overheads that
do not contribute to bringing
inventories to their present
location and condition
• Storage costs, unless other
costs necessary in the
production process before a
further production stage

Exercise Problem 1:

Materials 700,000
Storage costs of in-process goods 180,000
Delivery to customers 40,000
Irrecoverable purchase taxes 60,000

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Exercise Problem 2:

Materials 300,000
Production Labor Costs 330,000
Production Overheads 120,000
General administration costs 100,000
Marketing Costs 50,000

Brilliant Company purchases motorcycles

Exercise Problem 3: from various countries and exports them to
Europe. Brilliant Company has incurred the
following costs during the current year:
Cost of purchases based on vendors invoices 5,000,000
Trade discounts on purchases already deducted from 500,000
vendor’s invoices
Import duties 400,000
Freight and insurance on purchases 1,000,000
Other handling costs relating to imports 100,000
Salaries of accounting department 600,000
Brokerage commissions paid to agents for arranging 200,000
imports
Sales commission paid to sales agents 300,000
After-sales warranty costs 250,000

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Inventory, Measurement
Subsequent Measurement @ LOWER OF
COST AND NET REALIZABLE VALUE
• Net realizable value (NRV) is “the estimated selling price in the
ordinary course of business less the estimated cost of
completion and the estimated costs necessary to make the
sale.” (PAS 2.6)

• NRV is different from fair value. The former is an entity-

specific value the latter is not. NRV for inventories may
not equal fair value less cost to sell.

• Measuring inventories at the lower of cost and NRV is in line with

the basic accounting concept that an asset shall not be
carried at an amount that exceeds its recoverable
amount.

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ABC Co. bought inventories amounting to P5,000 on January 1, 2024. The

following data are the estimated net realizable value of the inventory. You are
tasked to analyze the appropriate measurement of the inventories under PAS 2.

DATE Net Realizable  If net realizable value is lower than cost,

Value the inventory is measured at NRV. In this
December 31, 2024 Php 7,500 case, the cost of inventory is written
down to NRV. The amount written down
December 31, 2025 6,000 is an expense.
December 31, 2026 4,500
December 31, 2027 5,500  If the NRV subsequently increases, the
previous write-down is reversed.
However, the amount of reversal shall
not exceed the original write-down.

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Exclusions from the

LCNRV

• Inventories of producers of
agricultural, forest, and
mineral products measured
at net realizable value per
well-established practices in
those industries.
• Inventories of commodity
broker-traders measured at
fair value less cost to sell.

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Reminder in Inventory
Write-down
• Write-downs of inventories
are usually carried out on an
item-by-item basis, although
in some circumstances, it
may be appropriate to group
similar items.
• Raw materials inventory is not
written down below cost if the
finished goods in which they will
be incorporated are expected to
be sold at or above cost. The
best evidence of NRV for raw
materials is replacement cost

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Recognition as an Expense
• The carrying amount of an inventory
that is sold is charged as expense
(i.e., cost of sales) in the period in
which the related revenue is
recognized.
• “The amount of any reversal of any
write-down of inventories, arising
from an increase in net realizable
value, shall be recognized as a
reduction in the amount of inventories
recognized as an expense in the
period in which the reversal occurs.”
(PAS 2.34)

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Cost Formulas
• The cost formulas deal with
the computation of cost
of inventories that are
charged as expense when
the related revenue is
recognized as well as the
cost of unsold inventories
at the end of the period
that are recognized as an
asset.
• The cost formulas refer to
“cost flow assumptions,” meaning
they pertain to the flow of
costs and not necessarily
to the actual physical
flow of inventories.

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Cost Formulas:
• Specific identification – this shall be used for
inventories that are not ordinarily
interchangeable and those that are
segregated for specific projects.
• First-In, First-Out (FIFO) – Under this formula, it is
assumed that inventories that were
purchased or produced first are sold first,
and therefore unsold inventories at the end
of the period are those most recently
purchased or produced.
• Weighted Average – Under this formula, cost of
sales and ending inventory are determined
based on the weighted average cost of
beginning inventory and all inventories
purchased or produced during the period.
• PAS 2 does not permit the use of last-in, first
out (LIFO)

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Sales (in
Jan Units Unit cost Total cost
units)
01 Beginning balance 800 200 160,000

08 Sale 500

18 Purchase 700 210 147,000

22 Sale 800

31 Purchase 500 220 110,000

Assume the ending inventory is 700 units. How much should the ending inventory be
accounted for under FIFO and weighted average method?

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Financial Statement
Presentation
• All items that meet the
definition of inventory are
presented on the
statement of financial
position as one line item
under the caption
“Inventories”.
• The breakdown of this line
item (as finished goods,
WIP and raw materials) is
disclosed in the notes.

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Disclosures
• Accounting policies adopted in measuring
inventories, including the cost formula
used;
• Total carrying amount of inventories and
the carrying amount in classifications
appropriate to the entity;
• Carrying amount of inventories carried at
fair value less costs to sell;
• Amount of inventories recognized as
expense during the period;
• Amount of any write-downs of inventories • Circumstances or events that led to the
recognized as an expense in the period; reversal of a write-down of inventories;
• Amount of any reversal of write-down that and
is recognized as a reduction in the amount • Carrying amount of inventories pledged as
of inventories as expense in the period; security for liabilities.

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