IND AS 2: Inventories

Over the years Inventories have been the backbone of any organization and the recognition of the same has also been widely discussed in different statues including Income tax and recently arrived Goods and Service Tax. Amongst all the other inventories related issues, I find the valuation of inventories part being the most dilutive and subjective matter in terms of what cost to be part of inventories rather than expensed out in a particular year.

Since AS 2 is fairly known to all of us, in this Note we discuss the various aspects of the Ind AS -2 Inventories that differs from the AS – 2 Valuation of Inventories.

Differences with examples

All of us are aware about the basic paras of AS-2 which are more or less carried forwarded to the Ind AS – 2. i.e. Inventories are valued at lower of Cost or Net realizable value whichever is less. So following will be in addition to all that we know about AS-2 and the new concepts that are brought into play by the Ind AS – 2.

Point of Difference	As per AS – 2	As per Ind AS - 2
Scope	a.      There is no scope exemption in AS 2 for any inventories held by Commodity traders.	a.   ONLY Measurement requirement of Ind AS 2 do not apply to inventories held by commodity brokers – traders who measure their inventories at fair market value less Cost to sell.
	b.      AS 2 excludes from its FULL SCOPE the producer’s inventories of livestock, agriculture and forest products, and mineral oil, Ores and gases to the extent that they are measured at net realizable value in accordance with well-established practices in those industries.	b. ONLY Measurement requirement of Ind AS 2 do not apply to inventories of forests products, agriculture produce after harvest and minerals and mineral products to the extent they are measured at net realizable value in accordance with well-established practices in those industries.      In other words, the other requirements laid down in the Standard are applicable. For example, disclosure requirements of this Standard are applicable to these types of inventories, say, disclosure of accounting policies adopted in measuring inventories
Inventories – Delayed payment terms	AS – 2 do not explicitly deal with any inventories purchased on deferred payment terms. The cost of inventories generally will be purchase price for deferred credit terms unless the contract states the interest payable for deferred terms.	Difference between the purchase price of inventories for normal credit terms and the amount paid for deferred settlement terms is recognized as interest expense.
Example e.g. If Mr. A gives a normal credit terms of 10 days to all the customer and sales his product XYZ for Rs. 100 per piece. Now if ABC Ltd. buys product XYZ from Mr. A for Rs. 102 for delayed payment terms of 60 days.	As per AS – 2, For the given example ABC Ltd. Would show the inventories at Rs. 102.	As per Ind AS – 2, for the given example ABC Ltd. Would show inventories at Rs. 100 and Rs. 2 should be booked as interest cost.
Cost Formula	It is not expressly mandated to use the same cost formula consistently for all inventories that have similar nature and use to the entity. The only requirement is formula used should reflect (a subjective term) the fairest possible approximation to the cost incurred in bringing the items of inventory to their present location and condition. It may defer for items having similar nature and use to the entity.	Irrespective of any other fact, Ind AS -2 requires an entity to use the SAME cost formula for all the inventories HAVING SIMMILAR NATURE and USE to the entity. For the inventories with different nature or use, different cost formulas may be justified.
Example Whether an entity can use different cost formulae for inventories held at different geographical locations having similar nature and use to it	Not expressly Denied	Since the inventories held at different geographical location are of similar nature and use to the entity, different cost formula cannot be used for inventory valuation purposes.
Inventories – Reversal of write down of Inventory	No specific Guidance in AS 2 for reversal of write down of inventories. May be covered by AS 5.	Write down of inventory may be reversed if circumstances that previously caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase in NRV because of change in economic circumstances. The amount of reversal is limited to the amount of the original write down.
Example In 2017-18 Product A which costed Rs. 1000 has been written down to 800 due to adverse government policies. In 2018-19 due to favorable change in the government policy the inventory value has increased.	No Specific Guidance in AS 2.	As mentioned, Ind AS do provide for reversal of write down in inventory. In the given example due to favorable government policy change the earlier write-down of the inventory may be reversed to the extent reversed.
Inventories (WIP) Of Service Provider	No Specific Guidance in AS 2	In the case of a service provider, inventories include the costs of the service for which the entity has not yet recognized the related revenue. To the extent that service providers have inventories, they measure them at the costs of their production. These costs consist primarily of the labour and other costs of personnel directly engaged in providing the service, including supervisory personnel, and attributable overheads.
Example:	Not Applicable	In an IT Company where the project is completed only after a Golive of the system at client’s end. So generally there are multiple projects going on at the end of the financial year for which the company would have incurred a personnel cost, overhead cost etc. With the help of IND AS – 2 provisions, the IT company would be able to recognize the same as Work In progress Inventories considering all other aspects are fully met.
Inventories – Classification	As per the requirements of Schedule III, inventories need to be classified as: ·         Raw materials, ·         WIP ·         Finished Goods ·         Stock in trade ·         Stores and spares ·         Loose tools ·         Others	No specific classification requirements. Classification should be appropriate to the entity.

In addition to the differences following are certain issues which are also worth considering viz-a-viz Ind AS -2 :

1.      Packing material:

As per paragraph 8 of Ind AS 2, inventories include ‘materials and supplies awaiting use in the production process.

While the primary packing material may be included within the scope of the term ‘materials and supplies awaiting use in the production process’ but the secondary packing material and publicity material cannot be so included, as these are selling costs which are required to be excluded as per Ind AS 2.

For this purpose, the primary packing material is one which is essential to bring an item of inventory to its saleable condition, for example, bottles, cans etc., in case of food and beverages industry. Other packing material required for transporting and forwarding the material will normally be in the nature of secondary packing material.

2.      Treatment of trade discount and Cash discount while determining the NRV

Trade discount is allowed either expressly through an agreement or through prevalent commercial practices in the terms of the trade and the same is adjusted in arriving at the selling price. Accordingly, the trade discount expected to be allowed should be deducted to determine the estimated selling price.

The Guidance Note on Terms Used in Financial Statements defines Cash Discount as “A reduction granted by a supplier from the invoiced price in consideration of immediate payment or payment within a stipulated period.” These type of costs are incurred to recover the sale proceeds immediately or before the end of the specified period or credit period allowed to the customer. In other words, these costs are not incurred to make the sale, therefore, the same should not be considered while determining NRV