Pas 2

Inventories
PRESENTED BY: RUBIO & DELA PENA
Objectives

• Prescribe the • To Provide guidance

accounting on the cost formulas
treatment for that are used to assign
inventories cost to inventories.
Scope • Inventories include assets
However, IAS 2
applies to all
held for sale in the ordinary inventories except:
course of business for example
1.) Work in process
the finished goods, assets in
arising under
the production process for sale
construction
in the ordinary course of
contracts.
business this would be the
2.) Financial
work in process, and materials
and supplies that are consumed
instruments
in production or the raw 3.) Biological assets
materials. arising from
agricultural activities
Recognition Principle

Inventories comprise assets that are:

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.

In addition to the above, spare parts and servicing equipment that do not meet the definition of property, plant and equipment are
treated as inventory. An entity should initially recognize inventory when it has control of the inventory, expects it to provide future
economic benefits and the cost of the inventory can be measured reliably.
Measurement Principles
Inventories shall be stated at the lower of cost and net realisable value.

TO THE EXTENT THAT SERVICE PROVIDERS HAVE INVENTORIES, THEY MEASURE THEM AT THE COSTS OF THEIR
PRODUCTION. THESE COSTS ARE PRIMARILY THE COSTS OF LABOUR DIRECTLY ENGAGED IN PROVIDING THE SERVICE,
INCLUDING SUPERVISORY PERSONNEL, AND ATTRIBUTE OVERHEADS.

• THE COSTS OF INVENTORIES OF ITEMS THAT ARE ORDINARILY INTERCHANGEABLE AND HAVE NOT BEEN PRODUCED
AND SEGREGATED FOR SPECIFIC PROJECTS IS DETERMINED BY USING THE FIRST-IN, FIRST-OUT (FIFO) OR WEIGHTED
AVERAGE COST FORMULA. THE SAME COST FORMULA SHALL BE ADOPTED HAVING A SIMILAR NATURE AND USE TO THE
ENTITY.

• INVENTORIES ARE USUALLY WRITTEN DOWN TO NET REALISABLE VALUE (NRV) ON AN ITEM BY ITEM BASIS, UNLESS IT IS
MORE APPROPRIATE TO GROUP SIMILAR OR RELATED ITEMS.
 Derecognition Principles
• Inventories should be derecognized when they are sold. At that point they are recognized
as an expense in the income statement, in the same period as the revenue from their sale
is recognized. An entity should also derecognize inventory when it has no future economic
value, for example obsolete inventory. Similarly, although the inventory is not
derecognized, write-downs to net realizable value result in the amount of the inventory
that has been written down being recognized as an expense in the period in which the
write-down occurs. If and when a write down is reversed, the reversal should be
recognized in the income statement in the period in which the reversal occurs and the
amount of inventories is increased accordingly. The reversal is netted against the amount
of inventories recognized as an expense in the period.
 Disclosure Requirements
• The following shall be disclosed in the financial statements
- the accounting policies for inventories
- the total carrying amount of inventories and the carrying
amount in classifications appropriate to the
entity
- the carrying amount of inventories carried at fair value less
costs to sell
- the amount of inventories recognised as an expense during
the period.
Analysis of the AFS
Assessment
 Recognition Principles
As Presented by the Company Assessment
The Company inventories presented by the According to Philippine Financial
company consist of petroluem products, materials
and supply. Reporting Standards, we believe the
The allowance for inventory resulting from the write-down of
accompanying financial statements
petroleum products to net realizable value accurately reflect the Company's
amounted to P8.9 million as at 31 December 2021 (2020 - P51.6 financial position as of December 31,
million and 2019 - P136.3 million) and
the allowance for obsolescence of finished products amounted to
2021 and 2020, as well as its financial
P6.0 million as at 31 December 2021 performance and cash flows for each of
(2020 - P17.3 million and 2019 - P27.4 million). In 2021, amount of the three years in the period ending
petroleum products written-off
amounted to P78.8 million as at 31 December 2021 (2020 - P582.3 December 31, 2021. (PFRSs).
million).
Of the total amount of inventories, the inventories with a cost of
P254.8 million as at 31 December 2021
(2020 - P243.9 million) are carried at net realizable value, this being
lower than cost which approximates
the inventories fair value less cost to sell.
Cost of inventories included as part of cost of sales amounted to
P123.7 billion for the year ended 31
December 2021 (2020 - P113.3 billion and 2019 - P158.3 billion)"
 Measurement Principles
As Presented by the Company Assessment

The Company holds collaterals for trade receivables from
third parties as at 31 December 2021 valued at
P4.6 billion (2020 - P4.2 billion) consisting of cash securities,
letters of credit or bank guarantees and
Real Estate Mortgages (REM). These securities can be applied
once the related customer defaults on
settlement of the Company’s receivables based on agreed credit
terms. The maximum exposure of the
Company is P7.4 billion as at 31 December 2021 (2020 - P4.6
billion) (see Note 31.b). These balances
relate to a number of independent customers with whom there is
We considered this as akey audit matter because the prices
of petroleum products are highly volatile due to various
factors such as global trends in demand and other economic
factors and the determination of the net realizable value
requires management to make an estimate of the
investories' selling price in the ordinary course of business.
The high price vitality may give rise to a circumstance where
the cost of the Company's inventories is significantly higher
than its net realizable value.

no recent history of default. The

The disclosure in relation to inventories are included in Note 5
carrying amount of trade and other receivables at the reporting
to financial statements. This basically indicates that specific
date approximated their fair value.
duties were made as a result of the measurement principle.
 Derecognition Principles
As Presented by the Company Assessment

Petroleum products are

derecognized when sold, and
materials and supplies are
derecognized when consumed. The
carrying amount of these
inventories is charged to cost of
sales in the statement of income, in
the period in which the related
revenue is recognized.
 Disclosure Requirements
As Presented by the Company
In the normal course of
business, the Company
transacts with companies,
which are considered related
parties under PAS 24, “Related
Party Disclosures”. The
appropriateness of accounting
policies used and the
reasonableness of accounting
estimates and related
disclosures made by
management.
Assessment
Although there are
restrictions on disclosing
specific information on the
AFS, the company has the
right to provide only detailed
and specific information
about financial properties.
With the restrictions the
entity followed the basic
requirements and
amendments that make entity
disclosure acceptable and
understandable.