Main purpose
The main purpose of this chapter is to explain the accounting principles involved in the valuation of Non current asset and inventory
Inventory defined
IAS 2 Inventories defines inventories as assets:
Held for sale in the ordinary course of business In the process of production for such sale In the form of materials or supplies to be consumed in the production process or in the rendering of services.
Figure 18.1
Inventory valuation
Important to get closing stock accurate Possibility for profit smoothing.
Figure 18.2
Figure 18.2
Figure 18.3
Figure 18.4
The cost of the inventory most recently received is charged out first at the most recent cost, i.e. the inventory value is based upon an old cost, which may bear little relationship to the current cost.
Last-in-first-out
Figure 18.5
For rental
For administration
Capitalisation ceases when asset substantially prepared for its intended use or sale.
Subsequent expenditure
Normally expensed
Capitalised if excess future economic benefits will flow
Extending useful life Upgrade to improve quality Adopting new production processes to significantly reduce costs.
Depreciation
Systematic allocation
funds already expended matching concept Going concern concept ignores net realisable value
Depreciable amount
Useful economic life.
Figure 15.2
Loss must be written off Ex Asset cost 2m After 3 years revalue 3 m( revaluation reserve 1 m) Current year impairment review and recoverable amount Found to be 1.2 m Impairment incurred is 1.8 m 1 m is charge to revaluation reserve .8 m to the income statement
Indications of impairment
Cost model
Apply same principle as IAS 16
Review questions
1. Define PPE and explain how materiality affects the concept of PPE. 2. Define depreciation. Explain what assets need not be depreciated and list the main methods of calculating depreciation. 3. What is meant by the phrases useful life and residual value?
Review questions
Discuss why some form of theoretical pricing model is required for inventory valuation purposes.
Discuss the acceptability of the following methods of inventory valuation: LIFO; replacement cost. Discuss the application of individual judgement in inventory valuation, e.g. changing the basis of overhead absorption.