AS 2 — Inventories

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Overview
IAS 2 Inventories contains the requirements on how to account for most types of
inventory. The standard requires inventories to be measured at the lower of cost and
net realisable value (NRV) and outlines acceptable methods of determining cost,
including specific identification (in some cases), first-in first-out (FIFO) and weighted
average cost.
A revised version of IAS 2 was issued in December 2003 and applies to annual periods
beginning on or after 1 January 2005.
History of IAS 2

Date Development Comments

September 1974 Exposure Draft E2 Valuation and

Presentation of Inventories in the
Context of the Historical Cost
System published

October 1975 IAS 2 Valuation and Presentation of

Inventories in the Context of the His-
torical Cost System issued

August 1991 Exposure Draft E38 Invento-

ries published

December 1993 IAS 9 (1993) Inventories issued Operative for annual

financial statements covering
periods beginning on or after
1 January 1995

18 December 2003 IAS 2 Inventories issued Effective for annual periods

beginning on or after 1
January 2005

Related Interpretations
o IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine
o SIC-1 Consistency - Different Cost Formulas for Inventories. SIC-1 was super-
seded by and incorporated into IAS 2 (Revised 2003).

Summary of IAS 2
 Objective of IAS 2
The objective of IAS 2 is to prescribe the accounting treatment for inventories. It
provides guidance for determining the cost of inventories and for subsequently recog-
nising an expense, including any write-down to net realisable value. It also provides
guidance on the cost formulas that are used to assign costs to inventories.

Scope
Inventories include assets held for sale in the ordinary course of business (finished
goods), assets in the production process for sale in the ordinary course of business
(work in process), and materials and supplies that are consumed in production (raw
materials). [IAS 2.6]
However, IAS 2 excludes certain inventories from its scope: [IAS 2.2]
o work in process arising under construction contracts (see IAS 11 Construction
Contracts)
o financial instruments (see IAS 39 Financial Instruments: Recognition and Measure-
ment)
o biological assets related to agricultural activity and agricultural produce at the point
of harvest (see IAS 41 Agriculture).
Also, while the following are within the scope of the standard, IAS 2 does not apply to
the measurement of inventories held by: [IAS 2.3]
o producers of agricultural and forest products, agricultural produce after harvest, and
minerals and mineral products, to the extent that they are measured at net realis-
able value (above or below cost) in accordance with well-established practices in
those industries. When such inventories are measured at net realisable value,
changes in that value are recognised in profit or loss in the period of the change
o commodity brokers and dealers who measure their inventories at fair value less
costs to sell. When such inventories are measured at fair value less costs to sell,
changes in fair value less costs to sell are recognised in profit or loss in the period
of the change.

Fundamental principle of IAS 2

Inventories are required to be stated at the lower of cost and net realisable value (NRV).
[IAS 2.9]

Measurement of inventories
Cost should include all: [IAS 2.10]
o costs of purchase (including taxes, transport, and handling) net of trade discounts
received
o costs of conversion (including fixed and variable manufacturing overheads) and
o other costs incurred in bringing the inventories to their present location and
condition
IAS 23 Borrowing Costs identifies some limited circumstances where borrowing costs
(interest) can be included in cost of inventories that meet the definition of a qualifying
asset. [IAS 2.17 and IAS 23.4]
Inventory cost should not include: [IAS 2.16 and 2.18]
o abnormal waste

o storage costs
o administrative overheads unrelated to production
o selling costs
o foreign exchange differences arising directly on the recent acquisition of inventories
invoiced in a foreign currency
o interest cost when inventories are purchased with deferred settlement terms.
The standard cost and retail methods may be used for the measurement of cost,
provided that the results approximate actual cost. [IAS 2.21-22]
For inventory items that are not interchangeable, specific costs are attributed to the
specific individual items of inventory. [IAS 2.23]
For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost
formulas. [IAS 2.25] The LIFO formula, which had been allowed prior to the 2003
revision of IAS 2, is no longer allowed.
The same cost formula should be used for all inventories with similar characteristics as
to their nature and use to the entity. For groups of inventories that have different charac-
teristics, different cost formulas may be justified. [IAS 2.25]

Write-down to net realisable 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. [IAS 2.6] Any
write-down to NRV should be recognised as an expense in the period in which the write-
down occurs. Any reversal should be recognised in the income statement in the period
in which the reversal occurs. [IAS 2.34]

Expense recognition
IAS 18 Revenue addresses revenue recognition for the sale of goods. When inventories
are sold and revenue is recognised, the carrying amount of those inventories is recog-
nised as an expense (often called cost-of-goods-sold). Any write-down to NRV and any
inventory losses are also recognised as an expense when they occur. [IAS 2.34]

Disclosure
Required disclosures: [IAS 2.36]
o accounting policy for inventories
o carrying amount, generally classified as merchandise, supplies, materials, work in
progress, and finished goods. The classifications depend on what is appropriate for
the entity
o carrying amount of any inventories carried at fair value less costs to sell
o amount of any write-down of inventories recognised as an expense in the period
o amount of any reversal of a write-down to NRV and the circumstances that led to
such reversal
o carrying amount of inventories pledged as security for liabilities
o cost of inventories recognised as expense (cost of goods sold).
IAS 2 acknowledges that some enterprises classify income statement expenses by
nature (materials, labour, and so on) rather than by function (cost of goods sold, selling
expense, and so on). Accordingly, as an alternative to disclosing cost of goods sold
expense, IAS 2 allows an entity to disclose operating costs recognised during the period
by nature of the cost (raw materials and consumables, labour costs, other operating
costs) and the amount of the net change in inventories for the period). [IAS 2.39] This is
consistent with IAS 1 Presentation of Financial Statements, which allows presentation of
expenses by function or nature.
AS 11 — Construction Contracts
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Overview
IAS 11 Construction Contracts provides requirements on the allocation of contract revenue and
contract costs to accounting periods in which construction work is performed. Contract revenues
and expenses are recognised by reference to the stage of completion of contract activity where
the outcome of the construction contract can be estimated reliably, otherwise revenue is recog-
nised only to the extent of recoverable contract costs incurred.
IAS 11 was reissued in December 1993 and is applicable for periods beginning on or after 1
January 1995.

History of IAS 11

December 1977 Exposure Draft E11 Accounting for Construction Contracts

March 1979 IAS 11 Accounting for Construction Contracts

1 January 1980 Effective date of IAS 11

May 1992 Exposure Draft E42 Construction Contracts

December 1993 IAS 11 (1993) Construction Contracts (revised as part of the 'Comparability of
Financial Statements' project)
 1 January 1995 Effective date of IAS 11 (1993)

1 January 2018 IAS 11 will be superseded by IFRS 15 Revenue from Contracts with Customers

Related Interpretations

o IFRIC 15 Agreements for the Construction of Real Estate

o IFRIC 12 Service Concession Arrangements

Summary of IAS 11

Objective of IAS 11
The objective of IAS 11 is to prescribe the accounting treatment of revenue and costs associ-
ated with construction contracts.

What is a construction contract?

A construction contract is a contract specifically negotiated for the construction of an asset or a
group of interrelated assets. [IAS 11.3]
Under IAS 11, if a contract covers two or more assets, the construction of each asset should be
accounted for separately if (a) separate proposals were submitted for each asset, (b) portions of
the contract relating to each asset were negotiated separately, and (c) costs and revenues of
each asset can be measured. Otherwise, the contract should be accounted for in its entirety.
[IAS 11.8]
Two or more contracts should be accounted for as a single contract if they were negotiated
together and the work is interrelated. [IAS 11.9]
If a contract gives the customer an option to order one or more additional assets, construction of
each additional asset should be accounted for as a separate contract if either (a) the additional
asset differs significantly from the original asset(s) or (b) the price of the additional asset is sep-
arately negotiated. [IAS 11.10]

What is included in contract revenue and costs?

Contract revenue should include the amount agreed in the initial contract, plus revenue from al-
ternations in the original contract work, plus claims and incentive payments that (a) are
expected to be collected and (b) that can be measured reliably. [IAS 11.11]
Contract costs should include costs that relate directly to the specific contract, plus costs that
are attributable to the contractor's general contracting activity to the extent that they can be rea-
sonably allocated to the contract, plus such other costs that can be specifically charged to the
customer under the terms of the contract. [IAS 11.16]

Accounting
If the outcome of a construction contract can be estimated reliably, revenue and costs should be
recognised in proportion to the stage of completion of contract activity. This is known as the per-
centage of completion method of accounting. [IAS 11.22]
To be able to estimate the outcome of a contract reliably, the entity must be able to make a
reliable estimate of total contract revenue, the stage of completion, and the costs to complete
the contract. [IAS 11.23-24]
 If the outcome cannot be estimated reliably, no profit should be recognised. Instead, contract
revenue should be recognised only to the extent that contract costs incurred are expected to be
recoverable and contract costs should be expensed as incurred. [IAS 11.32]
The stage of completion of a contract can be determined in a variety of ways - including the pro-
portion that contract costs incurred for work performed to date bear to the estimated total
contract costs, surveys of work performed, or completion of a physical proportion of the contract
work. [IAS 11.30]
An expected loss on a construction contract should be recognised as an expense as soon as
such loss is probable. [IAS 11.22 and 11.36]

Disclosure
o amount of contract revenue recognised; [IAS 11.39(a)]
o method used to determine revenue; [IAS 11.39(b)]
o method used to determine stage of completion; [IAS 11.39(c)] and
o for contracts in progress at balance sheet date: [IAS 11.40]
o aggregate costs incurred and recognised profit
o amount of advances received
o amount of retentions

Presentation
The gross amount due from customers for contract work should be shown as an asset. [IAS
11.42]
The gross amount due to customers for contract work should be shown as a liability. [IAS 11.42]
IAS 31 — Interests In Joint Ventures
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Overview
IAS 31 Interests in Joint Ventures sets out the accounting for an entity's interests in
various forms of joint ventures: jointly controlled operations, jointly controlled assets,
and jointly controlled entities. The standard permits jointly controlled entities to be
accounted for using either the equity method or by proportionate consolidation.
IAS 31 was reissued in December 2003, applies to annual periods beginning on or after
1 January 2005, and is superseded by IFRS 11 Joint Arrangements and IFRS 12 Dis-
closure of Interests in Other Entities with effect from annual periods beginning on or
after 1 January 2013.
History of IAS 31

December 1989 Exposure Draft E35 Financial Reporting of Interests in Joint Ventures

December 1990 IAS 31 Financial Reporting of Interests in Joint Ventures

1 January 1992 Effective date of IAS 31 (1990)

 1994 IAS 31 was reformatted

December 1998 IAS 31 was revised by IAS 39 effective 1 January 2001

18 December 2003 Revised version of IAS 31 issued by the IASB

1 January 2005 Effective date of IAS 31 (Revised 2003)

13 September 2007 Exposure Draft ED 9 Joint Arrangements issued. Proposes to replace

IAS 31 with a new standard titled Joint Arrangements.

10 January 2008 Some significant revisions of IAS 31 were adopted as a result of the
Business Combinations Phase II Project relating to loss of joint control

22 May 2008 IAS 31 amended for Annual Improvements to IFRSs 2007 for certain
disclosures and reversals of impairment losses (equity method)

1 January 2009 Effective date of the May 2008 revisions to IAS 31

1 July 2009 Effective date of the January 2008 revisions to IAS 31

12 May 2011 IAS 31 is superseded by IFRS 11 Joint Arrange-

ments and IFRS 12 Disclosure of Interests in Other Entities effective
1 January 2013

Related Interpretations
o SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers. Su-
perseded by IFRS 11 Joint Arrangements effective 1 January 2013

Summary of IAS 31

Scope
IAS 31 applies to accounting for all interests in joint ventures and the reporting of joint
venture assets, liabilities, income, and expenses in the financial statements of venturers
and investors, regardless of the structures or forms under which the joint venture activi-
ties take place, except for investments held by a venture capital organisation, mutual
fund, unit trust, and similar entity that (by election or requirement) are accounted for as
under IAS 39 at fair value with fair value changes recognised in profit or loss. [IAS 31.1]

Key definitions [IAS 31.3]

Joint venture: a contractual arrangement whereby two or more parties undertake an
economic activity that is subject to joint control.
Venturer: a party to a joint venture and has joint control over that joint venture.
Investor in a joint venture: a party to a joint venture and does not have joint control
over that joint venture.
 Control: the power to govern the financial and operating policies of an activity so as to
obtain benefits from it.
Joint control: the contractually agreed sharing of control over an economic activity.
Joint control exists only when the strategic financial and operating decisions relating to
the activity require the unanimous consent of the venturers.

Jointly controlled operations

Jointly controlled operations involve the use of assets and other resources of the
venturers rather than the establishment of a separate entity. Each venturer uses its own
assets, incurs its own expenses and liabilities, and raises its own finance. [IAS 31.13]
IAS 31 requires that the venturer should recognise in its financial statements the assets
that it controls, the liabilities that it incurs, the expenses that it incurs, and its share of
the income from the sale of goods or services by the joint venture. [IAS 31.15]

Jointly controlled assets

Jointly controlled assets involve the joint control, and often the joint ownership, of assets
dedicated to the joint venture. Each venturer may take a share of the output from the
assets and each bears a share of the expenses incurred. [IAS 31.18]
IAS 31 requires that the venturer should recognise in its financial statements its share of
the joint assets, any liabilities that it has incurred directly and its share of any liabilities
incurred jointly with the other venturers, income from the sale or use of its share of the
output of the joint venture, its share of expenses incurred by the joint venture and
expenses incurred directly in respect of its interest in the joint venture. [IAS 31.21]

Jointly controlled entities

A jointly controlled entity is a corporation, partnership, or other entity in which two or
more venturers have an interest, under a contractual arrangement that establishes joint
control over the entity. [IAS 31.24]
Each venturer usually contributes cash or other resources to the jointly controlled entity.
Those contributions are included in the accounting records of the venturer and recog-
nised in the venturer's financial statements as an investment in the jointly controlled
entity. [IAS 31.29]
IAS 31 allows two treatments of accounting for an investment in jointly controlled
entities – except as noted below:
o proportionate consolidation [IAS 31.30]

o equity method of accounting [IAS 31.38]

Proportionate consolidation or equity method are not required in the following excep-
tional circumstances: [IAS 31.1-2]
o An investment in a jointly controlled entity that is held by a venture capital
organisation or mutual fund (or similar entity) and that upon initial recognition is des-
ignated as held for trading under IAS 39. Under IAS 39, those investments are
measured at fair value with fair value changes recognised in profit or loss.
o The interest is classified as held for sale in accordance with IFRS 5.
o A parent that is exempted from preparing consolidated financial statements by
paragraph 10 of IAS 27 may prepare separate financial statements as its primary
financial statements. In those separate statements, the investment in the jointly con-
trolled entity may be accounted for by the cost method or under IAS 39.
o An investor in a jointly controlled entity need not use proportionate consolidation or
the equity method if all of the following four conditions are met:
1. the venturer is itself a wholly-owned subsidiary, or is a partially-owned sub-
sidiary of another entity and its other owners, including those not otherwise
entitled to vote, have been informed about, and do not object to, the venturer
not applying proportionate consolidation or the equity method;
2. the venturer's debt or equity instruments are not traded in a public market;
3. the venturer did not file, nor is it in the process of filing, its financial state-
ments with a securities commission or other regulatory organisation for the
purpose of issuing any class of instruments in a public market; and
4. the ultimate or any intermediate parent of the venturer produces consolidated
financial statements available for public use that comply with International
Financial Reporting Standards.

Proportionate consolidation
Under proportionate consolidation, the balance sheet of the venturer includes its share
of the assets that it controls jointly and its share of the liabilities for which it is jointly re-
sponsible. The income statement of the venturer includes its share of the income and
expenses of the jointly controlled entity. [IAS 31.33]
IAS 31 allows for the use of two different reporting formats for presenting proportionate
consolidation: [IAS 31.34]
o The venturer may combine its share of each of the assets, liabilities, income and
expenses of the jointly controlled entity with the similar items, line by line, in its
financial statements; or
o The venturer may include separate line items for its share of the assets, liabilities,
income and expenses of the jointly controlled entity in its financial statements.

Equity method
Procedures for applying the equity method are the same as those described in IAS
28 Investments in Associates.

Separate financial statements of the venturer

In the separate financial statements of the venturer, its interests in the joint venture
should be: [IAS 31.46]
o accounted for at cost; or
o accounted for under IAS 39 Financial Instruments: Recognition and Measurement.

Transactions between a venturer and a joint venture

If a venturer contributes or sells an asset to a jointly controlled entity, while the assets
are retained by the joint venture, provided that the venturer has transferred the risks and
rewards of ownership, it should recognise only the proportion of the gain attributable to
the other venturers. The venturer should recognise the full amount of any loss incurred
when the contribution or sale provides evidence of a reduction in the net realisable
value of current assets or an impairment loss. [IAS 31.48]
The requirements for recognition of gains and losses apply equally to non-monetary
contributions unless the gain or loss cannot be measured, or the other venturers con-
tribute similar assets. Unrealised gains or losses should be eliminated against the un-
derlying assets (proportionate consolidation) or against the investment (equity method).
[SIC-13]
When a venturer purchases assets from a jointly controlled entity, it should not
recognise its share of the gain until it resells the asset to an independent party. Losses
should be recognised when they represent a reduction in the net realisable value of
current assets or an impairment loss. [IAS 31.49]

Financial statements of an investor

An investor in a joint venture who does not have joint control should report its interest in
a joint venture in its consolidated financial statements either: [IAS 31.51]
o in accordance with IAS 28 Investments in Associates – only if the investor has sig-
nificant influence in the joint venture; or
o in accordance with IAS 39 Financial Instruments: Recognition and Measurement.

Partial disposals of joint ventures

If an investor loses joint control of a jointly controlled entity, it derecognises that invest-
ment and recognises in profit or loss the difference between the sum of the proceeds
received and any retained interest, and the carrying amount of the investment in the
jointly controlled entity at the date when joint control is lost. [IAS 31.45]

Disclosure
A venturer is required to disclose:
o Information about contingent liabilities relating to its interest in a joint venture. [IAS
31.54]
o Information about commitments relating to its interests in joint ventures. [IAS 31.55]
o A listing and description of interests in significant joint ventures and the proportion
of ownership interest held in jointly controlled entities. A venturer that recognises its
interests in jointly controlled entities using the line-by-line reporting format for pro-
portionate consolidation or the equity method shall disclose the aggregate amounts
 of each of current assets, long-term assets, current liabilities, long-term liabilities,
income, and expenses related to its interests in joint ventures. [IAS 31.56]
o The method it uses to recognise its interests in jointly controlled entities. [IAS 31.57]
Venture capital organisations or mutual funds that account for their interests in jointly
controlled entities in accordance with IAS 39 must make the disclosures required by IAS
31.55-56. [IAS