Conceptual

Framework and
Accounting
Standards
ATTY. ROWEL T. DE LEON, CPA
04
PAS 2
PAS 2
 Prescribes the accounting treatment for inventories.

 Provides guidance in the determination of cost of inventories, including the use of cost formulas,
and their subsequent measurement and recognition as expense.

 Applies to all inventories except the following:

1. Assets accounted for under other standards

a. Financial Instruments (PAS 32 and PFRS 9)
b. Biological assets and agricultural produce at the point of harvest.
2. Assets not measured under the lower of cost or net realizable value (NRV)
a. Inventories of producers of agricultural, forest, and mineral products.
b. Inventories of commodity broker-traders.
INVENTORIES
 Are assets:

 Held for sale in the ordinary course of business

(finished goods);

 In the process of production for such sale (work

in process); or

 In the form of materials or supplies to be

consumed in the production process or in the
rendering of services. (raw materials)

 Ordinary course of business refers to the

necessary, normal, or usual business activity of an
entity.
 MEASUREMENT

 Inventories are measured at the lower of

cost and NRV.
 MEASUREMENT

 Inventories are measured at the lower of

cost and NRV.
COST OF INVENTORIES
 Purchase Cost - includes: (1) Purchase Price (2) import duties (3) transport and handling costs (4)
other costs directly attributable to the acquisition of the inventory.

 Conversion Cost – includes direct labor and production overhead costs. Refer to costs necessary in
converting raw materials into finished goods.

 Other costs – necessary in bring the inventories to their present location and condition.
 Costs that are excluded and
expensed outright:

1. Abnormal amounts of wasted materials labor or

other production costs

2. Selling costs

3. Administrative overheads that not are directly

attributable to the bringing of the inventories to
their present location and condition

4. Storages costs.

a. For partially finished or partly completed –

capitalized

b. For finished goods – expensed outright.

 COST FORMULAS

 Deal with the computation of cost of

inventories that are charged as expense
when the related revenue is recognized as
well as the cost of unsold inventories at
the end of the period that are recognized
as assets.

 PAS 2 provides the following:

1. Specific Identification
2. First In – First Out (FIFO)
3. Weighted Average
 SPECIFIC IDENTIFICATION

 used for inventories that are unique and can be

segregated for specific projects. This method is
impracticable to use when inventories consist of a
large number of items that are ordinarily
interchangeable

 Cost of sales represents the actual costs of the

specific items sold while ending inventory
represents the actual costs of the specific items on
hand.
 FIFO

 Under this formula, inventories that were

purchased or produced first are sold first, and
therefore unsold inventories at the end of the
period represent the most recently purchased or
produced.

 Cost of Sales represents costs from earlier

purchases, while the cost of ending inventory
represents costs from the most recent purchases.
 WEIGHTED AVERAGE

 Under this formula, costs of sales and inventory

are determined based on the weighted average cost
of beginning inventory and all inventories
purchased or produced during the period.
Important Notes:
 The cost formulas pertain to the flow of costs
and not necessarily to the actual physical flow of
inventories.

 Same cost formula shall be used for all

inventories with similar nature and use.

 PAS 2 does not permit the use of LIFO (Last in –

First Out)
 NRV

 Is the estimated selling price in the

ordinary course of business less the
estimated costs of completion and the
estimated costs necessary to make the
sale.

 NRV is different from fair value.

Important Notes:
 Measuring inventories at lower of cost and NRV
is in line with the basic accounting principle that
an asset shall not be carried at an amount that
exceeds its recoverable amount.

 Cost of an inventory may exceed is recoverable

amount, in these circumstances, the cost of
inventory is written down to NRV. The amount
written down is recognized as an expense.

 If the NRV subsequently increases, the previous

write-down is reversed. However, the amount of
reversal shall not exceed the original write-
down.
 Recognition as Expense

 The carrying amount of an inventory that

is sold is charged as expense (i.e. cost of
sales) in the period in which the related
revenue is recognized.

 Write-down of inventories and all losses of

inventories are recognized as expense in
the period the write-down or loss occurs.

 Inventories that are used in the

construction of an asset is not expensed
but rather capitalized as cost of
constructed asset.
DISCLOSURES
1. Accounting policies adopted in measuring inventories.
2. Total carrying amount of inventories and the carrying amount in classifications appropriate to the
entity.
3. Carrying amount of inventories carried at fair value less costs to sell;
4. Amount of inventories recognized as expense during the period.
5. Amount of any write-down of inventories recognized as an expense in the period
6. Amount of any reversal of write-down that is recognized as a reduction in the amount of inventories
recognized as expense in the period.
7. Circumstances or events that let to the reversal of a write-down of inventories; and
8. Carrying amount of inventories pledged as security for liabilities.