INVENTORIES - CHAPTER SUMMARY

 Inventories are assets of an enterprise that are held for sale in the ordinary course of
business; in the process of production for such sales; or in the form of materials and
supplies to be consumed in the production process or in the rendering of services.

 The costs of inventories include all costs of purchase, costs of conversion and other
costs incurred in bringing the inventories to their present location and condition.
 The basic criterion for including items in inventory is economic control rather than
physical possession.

 There are two main objectives for accounting for inventories:

a) to measure the amount of inventory to be recognized as asset in the
statement of financial position
b) to measure the amount of inventory that will be recognized as expense in the
statement of comprehensive income

 Two alternative accounting systems for inventories may be adopted by business

enterprises, the periodic inventory system and the perpetual inventory system. A
company using periodic inventory system does not maintain a continuous record of
physical quantities or cost of inventory on hand. Net costs of purchases are
summarized in nominal accounts and a physical count is conducted at year-end to
establish the quantities and cost of inventories. A company using the perpetual
inventory system maintains a continuous record of inventory quantities and cost. A
physical count is conducted at least once a year only to confirm the inventory
balance per books.

 The cost of inventories is computed using a derived cost formula. The cost of
inventories that are not ordinarily interchangeable is determined using the specific
identification method. The cost of goods that are ordinarily interchangeable is
determined using either the first in, first out (FIFO) method or the weighted average
method. IAS 2 does not allow the use of the last in, first out (LIFO) method as
inventory costing procedure.

 Inventories on the statement of financial position are measured at the lower of cost
and net realizable value, their cost being computed using a derived formula (specific
identification, FIFO method, or weighted average method). Net realizable value is
estimated sales price reduced by cost to complete and sell the goods. Any write
down of inventories from cost to lower of cost and net realizable value is taken up as
an expense on the statement of comprehensive income.
 An error in recording purchases and inventories may affect the financial statements
of the period in which the error is committed as well as the financial statements of
the subsequent period.

 Estimating procedures may be used to determine the cost of inventories destroyed

by catastrophe, to measure the cost of inventories for interim financial statement
purposes and to validate the inventory cost determined through physical count. Two
alternative estimating procedures may be used: the gross profit method and the
retail inventory method. While the gross profit method is not allowed for annual
financial statement purposes, IAS 2 allows the use of the retail inventory method to
approximate the cost of inventory for annual financial statement purposes.

INTANGIBLE ASSETS – CHAPTER SUMMARY

 Intangible assets are assets lacking physical substance and provide the entity with
long-term rights and privileges. An intangible asset must meet three definition
criteria: (1) Identifiability, (2) Inflow of future economic benefits, and (3) Control over
the economic benefits that flow from the item.

 Initially, an intangible asset shall be measured at cost, which includes the purchase
price and directly attributable costs. The measurement of purchase price depends
on the specific manner of acquiring the intangible asset, such as: (1) separate
acquisition; (2) acquisition in a business combination; (3) acquisition by way of
government grant; (4) acquisition by exchanges of assets; and (5) internally
generated intangible asset.

 After initial recognition, an entire class of intangible assets may be carried under
either the cost model or the revaluation model. Under the cost model, the intangible
asset is carried at its cost less any accumulated amortization and any accumulated
impairment losses. Under the revaluation model, a class of intangible assets with
active market is carried at a revalued amount, being its fair value at the date of the
revaluation less any subsequent accumulated amortization and any subsequent
accumulated impairment losses.

 Costs incurred subsequent to initial recognition are recorded as expenses, unless

these costs provide economic benefits in excess of originally assessed standard of
performance.

 The amortization method is chosen based on expected pattern of economic benefits

to be received from the intangible asset. Where the pattern of benefit cannot be
demonstrated by the enterprise, the straight-line method is to be used.
 The enterprise shall review the useful life and amortization method adopted for
intangible asset, and when the reviewed useful life and pattern of economic benefits
differ from previous expectations, such changes are accounted for as change in
accounting estimate.

 Goodwill, intangible assets with indefinite useful lives, and intangible assets that are
not yet available for use are not to be amortized but are to be tested annually for
possible impairment and when there is an indication that the asset may be impaired.

 When the intangible no longer provides economic benefit to the enterprise, or when
the intangible asset is disposed, the same shall be derecognized.

 The financial statements shall include the required disclosures for the intangible
assets.

BIOLOGICAL ASSETS – CHAPTER SUMMARY

 Biological assets are living animals or plants. Examples are trees and shrubs in a
plantation farm and animals in a ranch.

 Agricultural produce is the harvested product of the entity’s biological assets.

 A bearer plant is a living plant that is used in the production or supply of agricultural
produce, is expected to bear produce for more than one period, and has a remote
likelihood of being sold as agricultural produce, except for incidental scrap sales.
Bearer plants are appropriately classified as part of property, plant, and equipment.
They are measured based on the measurement models applicable for property,
plant, and equipment.

 An entity recognizes initially a biological asset when the enterprise controls the asset
as a result of a past event; it is probable that future economic benefits will flow to the
entity; and the fair value or cost is measurable reliably.

 A biological asset should be measured initially and at each reporting date at its fair
value less estimates costs to sell.

 Change in fair value less costs to sell of a biological asset is taken to profit or loss in
the period in which the change arises.
 When the fair value of a biological asset cannot be measured reliably, it is measured
in the statement of financial position at cost less accumulated depreciation and
accumulated impairment losses. All other biological assets held by the entity shall
still be measured at fair value less estimated costs to sell. If the fair value becomes
reliably measurable for a biological asset previously measured at cost, the enterprise
shall switch to fair value less cost to sell measurement.

 All costs related to biological assets that are measured at fair value are recognized
in profit or loss when incurred, except for the cost of purchase.

 Agricultural produce is measured at fair value less costs to sell at the point of
harvest. There is no exemption to this rule, as there is a presumption that the fair
value of agricultural produce can always be measured reliably.

 After harvest, if agricultural produce are held for sale in the normal course of
business or are processed further, IAS/PAS 2, Inventories, shall apply.