Question 1

What is the objective of Ind AS 2, and how does it guide the accounting treatment of inventories?

Accepted Answer

The objective of Ind AS 2 is to prescribe the accounting treatment for inventories, ensuring that they are measured at the lower of cost and net realizable value. It guides the accounting treatment by defining inventories, detailing how to determine cost, including all expenditures directly attributable to bringing the inventory to its present location and condition, and emphasizing the importance of recognizing inventory as an expense when sold.

Question 2

Which types of assets are excluded from the scope of Ind AS 2?

Accepted Answer

Assets excluded from the scope of Ind AS 2 include biological assets related to agricultural activity, financial instruments, and work in progress arising from construction contracts. These exclusions are based on the specific nature and treatment of these assets under different accounting standards.

Question 3

Under what circumstances are inventories of agricultural producers or commodity broker-traders excluded from measurement requirements of Ind AS 2?

Accepted Answer

Inventories of agricultural producers or commodity broker-traders are excluded from measurement requirements of Ind AS 2 when they are measured at fair value less costs to sell, as these entities typically engage in trading activities where market prices are readily available.

Question 4

How does Ind AS 2 define “inventories”?

Accepted Answer

Ind AS 2 defines 'inventories' as assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process. It emphasizes measurement at the lower of cost and net realizable value.

Question 5

What components should be included in the cost of inventories according to Ind AS 2?

Accepted Answer

According to Ind AS 2, the cost of inventories includes the purchase cost, conversion costs (direct labor and overhead), and other costs incurred to bring the inventories to their present location and condition, excluding selling costs.

Question 6

Which costs are explicitly excluded from inventory cost under Ind AS 2?

Accepted Answer

Under Ind AS 2, costs explicitly excluded from inventory cost include abnormal amounts of wasted materials, storage costs that are not necessary for production, and administrative overheads that are not directly attributable to the production process.

Question 7

At what amount must inventories be measured under Ind AS 2?

Accepted Answer

Under Ind AS 2, inventories must be measured at the lower of cost and net realizable value. Cost includes the purchase price, conversion costs, and other costs incurred to bring the inventories to their present condition and location.

Question 8

How is net realisable value (NRV) defined under the standard, and when is it applied?

Accepted Answer

Net realisable value (NRV) is defined as the estimated selling price of an asset in the ordinary course of business, minus the estimated costs of completion and sale. It is applied primarily in the valuation of inventory to ensure that it is recorded at the lower of cost or NRV, reflecting the most accurate financial position.

Question 9

How is the write-down to NRV recognized, and under what conditions can it be reversed?

Accepted Answer

The write-down to Net Realizable Value (NRV) is recognized when the carrying amount of inventory exceeds its expected selling price less costs to complete and sell. This is typically recorded as an expense in the income statement. A write-down can be reversed if the reasons for the decline in value no longer exist, such as an increase in market demand or a decrease in production costs.

Question 10

Which cost formulas are acceptable under Ind AS 2 for measuring inventories?

Accepted Answer

Under Ind AS 2, the acceptable cost formulas for measuring inventories include the First-In, First-Out (FIFO) method, the Weighted Average Cost method, and the specific identification method. Each method affects the financial statements differently, especially in terms of profit reporting and tax implications.

Question 11

How should entities treat inventory valuation when items are not interchangeable or earmarked for specific projects?

Accepted Answer

Entities should use the specific identification method for inventory valuation when items are not interchangeable or earmarked for specific projects. This approach accurately matches costs with revenues, providing a clear reflection of inventory's true value on the financial statements.

Question 12

When should the cost of inventories be recognised as an expense?

Accepted Answer

The cost of inventories should be recognized as an expense when the related goods are sold, in line with the matching principle, which ensures that expenses are recorded in the same period as the revenues they help generate.

Question 13

How are inventories allocated to another asset (e.g., PPE) treated under Ind AS 2?

Accepted Answer

Under Ind AS 2, inventories allocated to another asset, such as property, plant, and equipment (PPE), are treated based on their cost, which should be included in the cost of the asset to which they are allocated, ensuring compliance with the relevant accounting standards.

Question 14

What accounting policy disclosures are required under Ind AS 2 for inventories?

Accepted Answer

Under Ind AS 2, accounting policy disclosures for inventories include the measurement basis used (e.g., cost or net realizable value), the cost formulas applied (like FIFO or weighted average), and any write-downs recognized during the period due to obsolescence or decline in value.

Question 15

What disclosures must be made concerning write-downs of inventories and their reversals?

Accepted Answer

Disclosures regarding write-downs of inventories must include the amount of the write-down, the circumstances that led to the write-down, and the reversal of any write-downs if circumstances change, as this impacts the financial statements and provides transparency to stakeholders.

Question 16

How should the carrying amount of inventories be classified in financial statements?

Accepted Answer

The carrying amount of inventories should be classified as current assets on the balance sheet, valued at the lower of cost or net realizable value. This classification is crucial as it affects liquidity ratios and overall financial health.

Question 17

What issues could arise from not clearly disclosing the cost formula used (e.g., FIFO vs weighted average)?

Accepted Answer

Not disclosing the cost formula can lead to misinterpretation of financial results, affecting investor confidence and decision-making. It may also raise compliance issues with regulatory bodies that require transparency in financial reporting.

Question 18

Why is it important to distinguish between cost formulas and accounting policies under Ind AS 2?

Accepted Answer

Distinguishing between cost formulas and accounting policies under Ind AS 2 is crucial because it affects inventory valuation and cost of goods sold, which in turn impacts profitability and financial reporting accuracy.

Question 19

How should an entity deal with valuation of primary vs secondary packing materials in inventory?

Accepted Answer

An entity should classify primary packing materials as part of the cost of goods sold since they are directly associated with the product. Secondary packing materials can be valued separately, often using a lower of cost or market approach, as they may not directly contribute to the product's value.

Question 20

A manufacturer includes advertising and distribution costs in inventory—does this comply with Ind AS 2?

Accepted Answer

No, including advertising and distribution costs in inventory does not comply with Ind AS 2, which states that only costs directly attributable to bringing the inventory to its present location and condition should be included. Advertising and distribution costs are typically expensed as incurred.

Question 21

An underperforming product’s inventory value drops below cost—how would Ind AS 2 require this to be handled?

Accepted Answer

Ind AS 2 requires that inventory be measured at the lower of cost or net realizable value. If the inventory value drops below cost due to underperformance, a write-down is necessary to reflect the lower value, which will impact profit and loss by recognizing an expense.

Question 22

A company reverses a prior write-down of inventory due to improved sales – how is that reported?

Accepted Answer

The reversal of a prior inventory write-down is reported as a reduction in cost of goods sold in the income statement, leading to an increase in net income. This must comply with GAAP, which requires that the reversal does not exceed the original write-down amount.

Ind AS 2 – Inventories Interview Q&A

A. Objective & Scope

Q1: What is the objective of Ind AS 2, and how does it guide the accounting treatment of inventories?

Q2: Which types of assets are excluded from the scope of Ind AS 2?

Q3: Under what circumstances are inventories of agricultural producers or commodity broker-traders excluded from measurement requirements of Ind AS 2?

B. Definitions & Cost Components

Q4: How does Ind AS 2 define “inventories”?

Q5: What components should be included in the cost of inventories according to Ind AS 2?

Q6: Which costs are explicitly excluded from inventory cost under Ind AS 2?

C. Measurement & Write-downs

Q7: At what amount must inventories be measured under Ind AS 2?

Q8: How is net realisable value (NRV) defined under the standard, and when is it applied?

Q9: How is the write-down to NRV recognized, and under what conditions can it be reversed?

D. Cost Formulas & Valuation Methods

Q10: Which cost formulas are acceptable under Ind AS 2 for measuring inventories?

Q11: How should entities treat inventory valuation when items are not interchangeable or earmarked for specific projects?

E. Recognition & Presentation

Q12: When should the cost of inventories be recognised as an expense?

Q13: How are inventories allocated to another asset (e.g., PPE) treated under Ind AS 2?

F. Disclosures & Transparency

Q14: What accounting policy disclosures are required under Ind AS 2 for inventories?

Q15: What disclosures must be made concerning write-downs of inventories and their reversals?

Q16: How should the carrying amount of inventories be classified in financial statements?

G. Practical Challenges & Judgement

Q17: What issues could arise from not clearly disclosing the cost formula used (e.g., FIFO vs weighted average)?

Q18: Why is it important to distinguish between cost formulas and accounting policies under Ind AS 2?

Q19: How should an entity deal with valuation of primary vs secondary packing materials in inventory?

H. Applied Scenarios

Q20: A manufacturer includes advertising and distribution costs in inventory—does this comply with Ind AS 2?

Q21: An underperforming product’s inventory value drops below cost—how would Ind AS 2 require this to be handled?

Q22: A company reverses a prior write-down of inventory due to improved sales – how is that reported?