MFRS 102 - INVENTORY

CORPORATE REPORTING

Lecturer: Dayana Mastura , FCCA UK, CA(M)

 At the end of this topic, Define inventories as per
students should be able to: MFRS 102 – Inventories

Identify and explain the Discuss the recognition and

classification of inventories measurement of inventories

LEARNNG
OUTCOMES Identify the types of costs
Apply the cost formulas for
measuring inventories under
the specific identification,
that should be included in
First In, First Out (FIFO),
the valuation of inventories
and Weighted-Average Cost
methods

Describe the key disclosure

of inventories
Importance of inventory

Inventory is a current asset and presented

in the company’s Statement of Financial
Position, thus the management of the
A business entity is expected to generate
Inventory forms a major part of business company is responsible to maintain an
revenue and profit after selling an
activities. optimum size of inventory for efficient
inventory
and smooth production and sales
operations, and to maintain investment in
inventories to maximize the profitability.

Excessive inventories would lead the

company to incur high costs such as
storage and the risk of wastage like Efforts should be made to place an order
expired inventories or a decline in price at the right time for the right quantity, at
due to being outdated; this would the right price and right quality.
eventually result in more expenses and
less revenue and profit for the company.
 MFRS 102 – Inventories was
issued in November 2011 with
the objective of prescribing
Held for sale in the ordinary
the accounting treatment for

Definition
course of business
inventories, According to MFRS
102, inventories are defined as
assets which are:

and scope of
MFRS 102 In the process of production for
In the form of materials or
supplies to be consumed in the
such sale, or production process or in the
rendering of services
 Once an inventory has been acquired, it becomes a
resource controlled by the business

Definition and The control is present when the risks and rewards
have been transferred to the entity
scope of MFRS The risk of ownership of the inventory has been
102 passed to the buyer, after receiving an inventory,
irrespective of whether payment has been made.

If an inventory is acquired in a particular year and

has not been sold at the end of the financial year,
the inventory should be recognized as an asset
Definition and scope of MFRS 102

• MFRS 102 indicates that inventories shall be measured at the lower

of cost and net realizable value
• Net realizable value is the amount of future economic benefits that
an entity can realistically anticipate when goods are sold.
• In the event where the cost of the inventory is more than the net
realizable value, and the future economic benefit aspect of
definition of an inventory is not satisfied, then the portion of the
cost of inventory cannot be recognized as an asset, and it must
therefore be written off.
• The cost of inventory can be measured at
cost (the amount paid or is payable to the
supplier) and the future economic benefits
are probable if the resale is probable;
therefore, inventory can be recognized as
an asset
Definition
and Scope of
MFRS 102
Definition and Scope of MFRS 102

This Work in progress arising under construction contracts

standard (MFRS 15 – Revenue from Contracts with Customers)
applies to all
inventories
with the Financial instruments (MFRS 9 – Financial
exception of Instruments) and
the following
types of
inventories: Biological assets related to agricultural activity and
agricultural produce (MFRS 141 – Agriculture)
 Business type – Retailer

Classification
of Inventories The cost of goods purchased
for resale and still on hand at
– Merchandise the reporting date

Inventory
Example – Groceries in
hypermarket
Classification of Inventories – Raw Material
Inventory

• Business type – Manufacturer

• Source products that are required when manufacturing the
products for sale
• Example – Rolls of silk in a cloth manufacturer factory
Classification of Inventory –
Work-In-Progress Inventory

• Business type – manufacturer

• Inventory that is partly complete
and held within the factory
• Examples – Trousers with no
pocket or back pocket, shirt with
no neck button and complete
collar
 Type of business –
Manufacturer
Classification of
Inventories – Inventory that is ready for
Finished product sale
inventory
Example – completed
trousers and shirts ready for
distribution to retailers
Initial Measurement – Cost of
Inventory
• The cost of inventory may comprise production and / or acquisition
costs
• Thus,the cost of inventories shall comprise of all costs of purchase,
cost of conversion and other costs bringing the inventories to their
present location and condition
• Cost of inventory = Purchase price + Conversion cost + Other costs
 Comprised of the purchase price, import duties
and other taxes, transport, handling and other
costs directly attributable to the acquisition of
Initial finished goods, materials and services.

Measurement Trade discounts, rebates and other similar items

– Cost of deducted in determining the cost of purchase

Purchase
Cost of purchase = Purchase price + import
duties + other direct costs
 The amount of labour cost that
is absorbed into the cost of
inventories will be based on the
Costs directly related to the
number of labour hours
units of production, such as
required to produce a product
direct labour
(normal production rates)
multiplied by the direct labour

Initial
rate per hour

measurement In the process of converting

materials into finished goods,
Cost of conversion = Direct cost

– Cost of
+ Indirect cost (allocated
fixed and variable production
production overheads)
overheads are involved

conversion
Allocated production overheads
= Fixed production overheads +
Variable production overheads
Initial measurement
– Other costs

• Costs that are incurred in bringing

the inventories to their present
location and condition, such as
non-production overheads or the
costs of designing products for
specific customers in the cost of
inventories
 The specific identification method requires the
cost of each item in the inventory to be
identified separately.

Usually, this method is applicable when

individual items can be clearly identified, such
Cost formula as with a serial number, stamped receipt date
or radio frequency identification (RFID) tag.

– Specific
Identification This method is ideal in situations where small
numbers of easily distinguishable items are
handled

Examples includes jewellery shops, antique

furniture shops, customized watch shops, art
galleries, automobiles, handicrafts and unique
cloth producers.
Cost formula – First In First Out (FIFO)

The FIFO method

Consequently, the items
Assumes that the items assumes that most of
remaining in inventory
of inventory that were the items in the
at the end of the period
purchased or produced inventory are fungible
are those most recently
first are sold first and perishable
purchased or produced.
inventory.
 The cost of each items is determined from the
weighted average of the cost of similar items at the
beginning of a period and the cost of similar items
purchased or produced during the period.

The average may be calculated on a periodic basis or

Cost formula as each individual shipment is received depending
upon the circumstances of the entity.
– Weighted- This method is used when all similar inventories are
Average Cost stored in a warehouse container where it is rarely
emptied completely, such as nuts and bolts and
stationery items.

It is also appropriate to use this method when there is

a fluctuating price of inventory items to get more
comparison between sales and cost of sales.
 MFRS 102 indicates that inventories shall be measured at the
lower of cost and net realizable value except for inventories
in certain specialized industries.

The inventory on hand at the reporting date should be

Net measured at cost; if the cost is higher than the net
realizable value of the inventory, the inventory should be
written down to its net realizable value.
Realizable
Value (NRV) Inventory is the only asset that cannot be measured above
cost.

The practice of writing inventories down below cost to the

net realizable value is consistent with the view that assets
should not be carried in excess or overstated with the
amounts expected to be realized from their sale or use.
Net Realizable Value (NRV)

• MFRS 102 – Inventories defines net realizable value as 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.
• The NRV assessment must be made in each subsequent period until
the inventory is sold.
• When inventories are sold, the carrying amount of those
inventories shall be recognized as an expense in the period in
which the related revenue is recognized,
 The difference between the cost and the NRV if the
inventory represents a loss is recognized as an expense in
the Statement of Comprehensive Income in that financial
report.

The amount of any write-down of inventories to NRV and

Net all losses of inventories shall be recognized as an expense

in the period the write-down or loss occurs.

Realizable
Value (NRV)
The amount of any reversal of any write-down of
inventories, arising from an increase in NRV shall be
recognized as a reduction in the amount of inventories
recognized as an expense in the period in which the
reversal occurs.

The cost of inventories may not be recoverable if those

inventories are either damaged, wholly or partially
obsolete or if their selling prices have declined
 MFRS 102 – Inventories
require businesses to
The accounting policies
disclose the following
adopted in measuring
pertaining to the disclosure
inventories, including the
of inventories in their
cost formula used.
company’s financial
Disclosure statements:

Requirement
The total carrying amount of
The carrying amount of
inventories and the carrying
inventories carried at fair
amount in classifications
value less costs to sell
appropriate to the entity.
Q & A session
THANK YOU