PAS 2

INVENTORIES
 INTRODUCTION
o PAS 2 prescribes the accounting treatment for
inventories. PAS2 recognizes that a primary issue in the
accounting for inventories is determination of a cost to
be recognized as asset and carried forward until it is
expensed.
o Accordingly, PAS 2 provides guidance in the
determination of cost of inventories, including the use of
cost of formulas, and their subsequent measurement
and recognition as expense.
 INTRODUCTION
PAS 2 applies to all inventories except for the
following:
 Assets accounted for under other standards

a. Financial instruments (PAS 32 and PFRS 9); and

b. Biological assets and agricultural produce at the point
of harvest (PAS 41).
 INTRODUCTION
PAS 2 applies to all inventories except for the
following:
 Assets not measured under the lower of cost or net
realizable value (NRV) under PAS 2
a. Inventories of procedures of agricultural, forest, and
mineral products measured at net realizable value in
accordance with well-established practices in those
industries.
b. Inventories of commodity broke-traders measured at
fair value less costs to sell.
INVENTORIES
Inventories are assets:
A. Held for sale in the ordinary course of business (finished goods)

B. In the process of production for such sale (work in

process) ; or

C. In the form of materials or supplies to be consumed in the

production process or in the rendering of services (raw materials
and manufacturing supplies)
INVENTORIES
Classification of inventories:
 Merchandising Operations
a) Merchandise Inventory
 Manufacturing Operations
a) Raw Materials
b) Work in Process
c) Finished Goods
d) Factory Supplies

 Ordinary course of business refers to the

necessary , normal or usual business activities
of an entity.
MEASUREMENT
 Inventories are measured at the lower of cost net realizable
value (NRV).

COST OF INVENTORIES
 The cost of inventories comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their
present location and condition.
 The cost of inventories comprises the following :
a. 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.
 b. Conversion costs – these refer to the costs necessary in converting
raw materials into finished goods. Conversion costs include the costs of
direct labor and production overhead.
c. Other costs – necessary in bringing the inventories to their present
location and condition.

Cost that are EXPENSED when incured

1. Abnormal amounts of wasted materials , labor or other production
costs.
2. Selling costs, for example , advertising and promotion costs and
delivery expense or freight out.
3. Administrative overheads that do not contribute to bringing
inventories to their present location and condition.
4. Storage costs, unless those costs are necessary in the production
process before a further production stage, (e.g., the storage costs are
partly finished goods may be capitalized as cost of inventory , but the
Illustration:
Entity A acquires inventories and incurs the following costs:
Purchase price, gross of trade discount 100,000
Trade discount 20,000
Non-refundable purchase tax, not included
in the purchase price above 5,000
Freight-in (Transportation costs) 15,000
Commission to broker 2,000
Advertisement costs 10,000
Requirement: How much is the cost of the inventories purchased?
Solution:
Purchase price, gross of trade discount 100,000
Trade discount (20,000)
Non-refundable purchase tax 5,000
Freight-in (Transportation costs) 15,000
Commission to broker 2,000
Total costs of inventories 102,000
 The advertisement costs are selling costs. These are expensed in the
period in which they are incurred.

Cost Formulas
 The cost formulas deal with the computation of cost of inventories that are
charged as expense when the related revenue is recognized (i.e. ‘cost of
sales’ or ‘cost of good sold’) as well as the cost of unsold inventories at the
end of the period that are recognized as asset (i.e. ‘ending inventory’).

PAS 2 provides the following cost formulas:

1. Specific Identification – shall be used for inventories that are not
ordinarily interchangeable(i.e., used for inventories that are unique ). Cost
of sales is the costs of the specific inventory that was sold.
2. 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
Cost Formulas
PAS 2 provides the following cost formulas:

3. Weighted Average Cost – 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. The
average may be canculated on a periodic basis, or as each additional
purchase is made, depending upon the circumstances of the entity.

 The cost formulas refer to “cost of flow assumptions”, meaning they

pertain to the flow of costs (i.e., from inventory to costs of sales) and
not necessarily to the actual physical flow of inventories. Thus, the
FIFO or Weighted Average can be used regardless of which item of
inventory is physically sold first.
Illustration:
Entity A, a trading entity, buys and sells Product A. Movements in the inventory of
Product A during the period are as follows:
Date Transaction Units Unit cost Total
cost
Jan. 1 Beginning inventory 100 10.00 1,000.00
7 Purchase 300 12.00 3,600.00
12 Sale 320
21 Puchase 200 14.00 2,800.00

Case 1: FIFO
Compute for the ending inventory and cost of sales using the FIFO cost formula.

Step 1: Compute for ending inventory in units.

Date Transaction Units
Jan. 1 Beginning inventory 100
7 Purchase 300
12 Sale (320)
21 Purchase 200
Ending inventory (in units) 280
Step 2: Compute for ending Inventory at cost.
Units Unit cost Total cost
From Jan. 21 Purchase 200 14.00 2,800.00
From Jan. 7 Purchase (280-200) 80 12.00 960.00
Ending inventory (at cost) 3,760.00

Step 3: Compute for cost of sales.

Date Transaction Units Unit cost Total

cost
Jan. 1 Beginning inventory 100 10.00 1,000.00
7 Purchase 300 12.00 3,600.00
21 Purchase 200 14.00 2,800.00
Total goods available for sale 600 7,400.00
Less: Ending inventory (280) (3,760.00)
Cost of sales 320 3,640.00
Case 2.1: Weighted Average
Compute for the ending inventory and cost of sales using the Weighted Average
cost formula. The average is calculated a periodic basis .

Step 1: Compute for the total goods available for sale in units and at cost.
Date Transaction Units Unit cost Total
cost
Jan. 1 Beginning inventory 100 10.00 1,000.00
7 Purchase 300 12.00 3,600.00
21 Puchase 200 14.00 2,800.00
Total goods available for sale 600 7,400.00

Step 2: Compute for weighted average unit cost.

Formula:
Weighted Total goods available for sale (TGAS) in pesos
=
Ave. cost Total goods available for sale (TGAS) in units

Weighted average unit cost = 7,400.00/600=12.33.00

Step 3: Compute for ending inventory at cost.

Ending inventory (in units) – see computation in Case 1 280

Weighted average unit cost 12.33.00
Ending inventory (at cost) 3,452.40

Step 4: Compute for cost of sales.

Total goods available for sale (at cost) 7,400.00
Less: Ending inventory (at cost) (3,452.40)
Cost of sales 3,947.60

Case 2.2: Weighted Average

Compute for the ending inventory and cost of sales using the Weighted
Average cost formula. The average is calculated as each additional
purchase is made (also called moving average).
 Date Transaction Units Unit cost Total
cost
Jan. 1 Beginning inventory 100 10.00 1,000.00
7 Purchase 300 12.00 3,600.00
400 11.50 4,600.00
12 Sale (320) (3,680.00)
21 Puchase 200 14.00 2,800.00
Ending inventory 280 3,720.00

Moving ave. cost = TGAS at cost / TGAS in

units
= (4,600.00/ 400) = 11.50.00
Cost of sales = 320 units sold x 11.50.00 moving average cost =
3,680.00

Net Realizable Value (NRV)

 is 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.
Net Realizable Value (NRV)
 NRV is different from fair value. “ Net realizable value refers to
the net amount that an entity expects to realize from the sale
of inventory in the ordinary course of business.
 Fair value reflects the price at which an orderly transaction to
sell the same inventory in the principal (or most
disadvantageous) market for that inventory would take place
between market participants at the measurement date.The
former is an entity-specific value; the latter is not. Net
realizable value for inventories may not equal fair value less
costs 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.
 Net Realizable Value (NRV)
 The cost of an inventory may exceed its recoverable amount if , for
example, the inventory is damaged, becomes obsolete, prices have
declined, or the estimated costs to complete or to sell the inventory
have increased. In these circumstances, the costs of the inventory is
writen-down to NRV. The amount of write-down is recognized as
expense.
 If the NRV subsequently increases, the previous write-down is
reversed. However, the amount of reversal shall not exceed the
original write-down. This is so that the new carrying amount is the
lower of the cost and the revised NRV.
 Write-down of inventories are usually carried out on an item by
item basis, although in some circumstances, it may be appropriate
to group similar items. It is not appropriate to write down
inventories on the basis of their classification (e.g., finished goods or
 Net Realizable Value (NRV)
 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. If, however, this is not the case, the raw materials are
written down to their NRV. The best evidence of NRV for raw materials
is replacement cost.

Illustration 1:
Information on Entity A’s inventories is as follows:
Product A Product B
Cost 100,000 200,000
Estimated selling price 140,000 220,000
Estimated costs to sell 20,000 30,000
 Requirement: Compute for the valuation of Products A and B in Entity
A’s statement of financial position.
Solution:
Product A Product B
Cost 100,000 200,000
Estimated selling price 140,000 220,000
Estimated costs to sell (20,000) (30,000)
Net realizable value 120,000 190,000

Lower 100,000 190,000

Amount of write-down - 10,000

Analysis:
 Product A need not be written-down because its costs its lower than
its NRV.
 Analysis:
 Product B shall be written-down by 10,000.00 because its costs
exceeds its NRV (200,000 cost less 190,000 NRV).
 The total inventory to be shown in the statement of the financial
position is 290,000.00 (100,000 for Product A + 190,000 for Product
B).
 The 10,000.00 write-down is recognized as expense in profit or loss.
 Continuation:
Assume that in a subsequent period, the NRV of Product B increases as
follows:
Product B
Cost 80,000
Net realizable value 100,000
Analysis:
 The increase is 20,000.00 (100,000-80,000). However, the amount of
reversal that Entity A can recognize is limited to 10,000.00,i.e., the
amount of the original write-down.
Analysis:
 The amount of inventory to be shown in the statement of financial
position is 90,000.00 (80,000 cost + 10,000 reversal).

Illustration 2:
Information on Entity A’s inventories is as follows:
Raw materials Finished goods
Cost 60,000 100,000
Replacement/NRV 50,000 120,000

Requirement: Compute for the valuation of the inventories in Entity A’s

statement of financial position.

Answer:
160,000.00 total cost (60,000+100,000). The raw materials need not
be written-down to replacement cost because the NRV of the finished
goods exceeds the cost.
Reversal of write-down
 The amount of reversal to be recognized should not exceed the amount of
the original write-down previously recognized.

Recognition as an expense
 The carrying amount of an inventory that is sold is changed as expense
(i.e., cost of sales) in the period in which the related revenue is
recognized. Likewise, the write-down of inventories to NRV and all losses
of inventories are recognized as expense in the period the write-down or
loss occurs.
Disclosures
a. Accounting policies adopted in measuring inventories, including the cost
formula used;
b. Total carrying amount of inventories and the carrying amount in
classifications appropriate to the entity;
c. Carrying amount of inventories carried at fair value less costs to sell;
Disclosures
d. Amount of inventories recognized as an expense during the
period;
e. Amount of any write-down of inventories recognized as an
expense in the period;
f. Amount of any reversal of write-down that is recognized as a
reduction in the amount of inventories recognized as expense in
the period;
g. Circumstances or events that led to the reversal of a write-down
of inventories; and
h. Carrying amount of inventories pledged as security for liabilities,
(PAS 2.36)
Presentation and
Disclosure
Inventories are required to be disclosed as a separate item on the
company's balance sheet.
 As well, significant categories of inventories should be disclosed, such
as raw materials, work in process, and finished goods. As with any
significant balance sheet item, the company's accounting policies for
measuring and reporting inventories, including its chosen cost formula,
should be disclosed.
 The company should also disclose the amount of inventories recognized
as an expense during the period. This would normally be disclosed as
cost of goods sold, but there may be other material amounts that could
be disclosed separately, such as write-downs due to obsolescence and
subsequent reversals of those write-downs.
 As well, under IFRS, additional details of the write-downs need to be
disclosed, such as qualitative reasons for the write-downs or
subsequent reversal. If the inventory has been pledged as collateral for
any outstanding debt, this fact needs to be disclosed, along with the
amount pledged.
 PAS 41

BIOLOGICAL AND
AGRICULTURAL ASSETS
BIOLOGICAL ASSETS
 Are living animals (bearer animals) and living plants (bearer plants).

AGRICULTURAL

PRODUCE
The harvested product of the entity’s biological assets.
 Harvest is the detachment of produce from a biological asset or
cessation of a biological asset’s life processes.

AGRICULTURAL

ACTIVITY
Management by an entity of the biological transformation and harvest of
biological assets for sale or for conversion into agricultural produce or into
additional biological assets.

BIOLOGICAL
 Comprises the growth, degeneration, production and procreation that
TRANSFORMATION
causes qualitative or quantitative changes in the biological asset .
 BIOLOGICAL
1.)Asset changes through:
TRANSFORMATION
1. Growth-increase in quantity or improvement in quality of an animal or
plant
2. Degenaration-decrease or detoriation in the quality of a biological asse
3. Procreation-creation of additional living animal or plant
2.) Production of agriculture produce such as latex, tea leaf, wool
and milk
Examples:ASSETS
BIOLOGICAL AGRICULTURAL PRODUCTION PRODUCT AFTER
HARVEST

Sheep Wool Yarn, carpet

Trees in plantation forest Felled trees logs, lumber
Sugarcane plant Harvested cane Sugar
Pigs Carcass Sausages, cured ham
 MEASUREMENT:
 The measurement of biological assets and agricultural produce is covered
by PAS41 and the measurement of products after harvest is covered by
PAS2 on inventories.

• MEASUREMENT OF BIOLOGICAL ASSET

It can be measured ion initial recognition and at the end of each
reporting period at fair value less cost disposal.

• MEASUREMENT AND PRESENTATION OF AGRICULTURAL PRODUCE

A. Agricultural produce as it grows
Agricultural Produce growing on bearer plant is measured at fair value
less cost of disposal with changes recognized in profit or less as the
produce grows or at the end of each reporting period prior to
harvest at fair value less cost of disposal .
MEASUREMENT:
• MEASUREMENT AND PRESENTATION OF AGRICULTURAL PRODUCE
B. Harvested produce
Is measured at fair value less cost of disposal at the point of harvest.
The harvested product becomes an inventory and shall be subsequently at
the lower of cost and net realizable value. It is recorded by debiting
inventory and crediting gain from change in fair value.

C. Immature bearer plants

Measured at accumulated cost and it only ceases when the plant reach its
maturity.

D. Mature bearer plants

“ There is no specific guidance when bearing plants reach its maturity.
Judgement is required and entities need an accounting policy to determine when
bearer plants reach its maturity”
Its carrying amount is depreciated on a systematic basis over its useful life.
Its useful life is the number of years that it bears agricultural produce.
• FAIR VALUE MEASUREMENT OF BIOLOGICAL ASSETS
There is presumption that fair value can measured reliably
for a biological asset . However, this presumption can be
rebutted only on initial recognition for a biological asset for
which market- determined prices are not available or
estimates of fair value determined to be clearly unreliable.
The biological asset shall be measured at cost less
accumulated depreciation and any accumulated impairment
loss. However, once fair value of such biological asset
becomes clearly measurable, the entity shall measure the
biological asset at fair value less of disposal.

• FAIR VALUE MEASUREMENT OF AGRICULTURAL PRODUCE

It is shall be measured at the point of harvest at fair value
less cost of disposal. It can be always measured reliably
The measurement of agricultural produce STOPS at the
• RECOGNITION OF BIOLOGICAL ASSETS AND AGRICULTURAL
PROCEDURES
An entity shall recognized a biological asset or a agricultural
procedure when:
1. The entity controls asset as a result of past events.
2. It is probable that future economics benefits associated with
the asset will flow to the entity.
3. The fair value or cost of the asset can be measured reliably.
Government grants

 Unconditional government grants received in respect of biological

assets measured at fair value less costs to sell are recognized in profit
or loss when the grant becomes receivable. [IAS 41.34]
 If such a grant is conditional (including where the grant requires an
entity not to engage in certain agricultural activity), the entity
recognizes the grant in profit or loss only when the conditions have
 DISCLOSURE
General
disclosures:
a) The aggregate gain or loss arising on initial recognition
of biological assets and agricultural produce and from
the change in fair value less costs to sell of biological
assets.
b) Description of each group of biological assets.
c) Description of the nature of activities involving each
group of biological assets and physical quantities of
assets on hand at the end of the period and output of
agricultural produce during the period.
d) Restrictions on titles to biological assets.
 DISCLOSURE
General
disclosures:
e) Commitments for the development or acquisition of
biological assets.
f) Financial risk management strategies related to
agricultural activity.
g) Reconciliation of changes in the carrying amount of
biological assets, showing changes in fair value less costs
to sell, purchases, sales, harvesting, business
combinations, and foreign exchange differences.
 DISCLOSURE
Encouraged
disclosures:
The following disclosures are encouraged but not
required:
a. Consumable and bearer biological assets
b. Mature and immature biological assets
 Mature biological assets – are “those that have
attained harvestable specifications (for consumable
biological assets) or are able to sustain regular harvest
(for bearer biological assets).” (PAS 41.45)
c. Change in fair value less costs to sell during the period
(1) due to price change and (2) due to physical change.
 DISCLOSURE
Disclosures for biological assets measured at
costs:
a. Description of the assets
b. An explanation of why fair value cannot be reliably
measured
c. If possible, a range within which fair value is highly
likely to lie
d. Depreciation method, useful lives or depreciation rates
e. Reconciliation of gross carrying amount and
accumulated depreciation at the beginning and end of
the reporting period, showing information on
depreciation, impairment loss and reversal of
 DISCLOSURE
Disclosures for biological assets measured
at costs:

a.Nature and extent of recognized

government grants.
b.Unfulfilled conditions.
c.Significant decreases expected in the
level of government grants.(PAS 41.57)
 PFRS 6
EXPLORATION FOR AND
EVALUATION OF MINERAL
RESOURCES
 INTRODUCTION
PFRS 6 addresses the accounting for expenditures
on exploration for and evaluation of mineral
resources.
 Exploration for and evaluation of mineral
resources is “the search for mineral resources,
including minerals, oil, natural gas and similar non-
regenerative resources after the entity has obtained
legal rights to explore in a specific area, as well as
the determination of the technical feasibility and
commercial viability of extracting the mineral
 INTRODUCTION
PFRS 6 addresses the accounting for
expenditures on exploration for and evaluation
of mineral resources.
 Exploration and evaluation expenditures
are “ expenditures incurred by an entity in
connection with the exploration for and
evaluation of mineral resources before the
technical feasibility and commercial viability of
extracting a mineral resources are
 REPORTING
STANDARDS
(PAS 8)

1. PFRSs 2. JUDGEMENT

Management shall Management may

consider: consider:
a. Requirements in other PFRSs a. Pronouncements issued by
dealing with similar transactions other standard-setting bodies
b. Conceptual Framework b. Other accounting literature
and industry practices
Initial Measurement
 Exploration and evaluation assets are initially measured at
cost
 Exploration and evaluation assets – are “exploration and
evaluation expenditures recognized as assets in
accordance with the entity’s accounting policy”.
Examples of expenditures that might be included in the initial
measurement of exploration and evaluation assets:

a. Acquisition of rights to explore

b. Topographical, geological, geochemical and geophysical
studies
c. Exploratory drilling
 Initial Measurement
Examples of expenditures that might be included in the initial
measurement of exploration and evaluation assets:

e. Sampling
f. Activities in relation to evaluating the technical feasibility
and commercial viability of extracting a mineral resource.

Subsequent Measurement
 Exploration and evaluation assets are subsequently
measured using either the cost model or the
revaluation model.
Changes in accounting policies
 An entity may change its accounting policy for exploration
and evaluation expenditures if the change results in more
relevant and no less reliable, or more reliable and
no less relevant, information.

Classification of exploration and

evaluation assets
 Exploration and evaluation assets are treated as a
separate class of assets and classified as tangible
(e.g. vehicles and drilling rigs) or intangible (e.g drilling
rights) depending on the nature of the assets.
 Reclassification of exploration and
evaluation assets
 When the technical feasibility and commercial
viability of extracting a mineral resource are
demonstrable, the exploration and evaluation
assets are reclassified in accordance with other
relevant standards.
 The exploration and evaluation assets are
assessed first for impairment before the
reclassification.
Impairment Loss
 Exploration and evaluation assets are assessed
for impairment when indication exists that their
carrying amount exceeds their recoverable
amount.
 The entity applies PAS 36 when making the
assessment, except for the allocation of
impairement loss on assets within cash-
generating units wherein the entity is allowed to
determine its own accounting policy for allocation.
 Examples of indications that exploration and
evaluation assets need to be assessed for impairment:

a. The right to explore has expired or will expire in the

near future and is not expected to be renewed.
b. Expenditures for further exploration and evaluation
activities are significantly higher than expected.
c. The exploration and evaluation activities in a specific
area have to be discontinued because no mineral
resources have been discovered.
d. Indicators exists that, although a specific area will be
developed, the carrying amount of the exploration
and evaluation assets is unlikely to be fully recovered.
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