HKAS 2 - Inventories (Condensed)
| Section | Key Concept | Brief Description |
|---|---|---|
| Objective & Scope | Scope exclusions | Full exclusion: financial instruments, biological assets. Measurement exclusion: certain agricultural/mineral products, broker-trader inventories. |
| Definitions | Inventories, NRV, Fair Value | Inventories are assets held for sale, in production, or as supplies. NRV is entity-specific; Fair value is market-based. |
| Measurement | Lower of cost and NRV | Fundamental principle: inventories measured at the lower of cost and net realisable value. |
| Cost of Inventories | Components of cost | All costs of purchase, conversion, and other costs to bring to present location and condition. |
| Cost Formulas | FIFO, Weighted Average, Specific ID | Specific ID for non-interchangeable items; FIFO or Weighted Average for others. LIFO prohibited. |
| Net Realisable Value | Write-down and reversal | Write down item-by-item when cost not recoverable. Reverse when circumstances improve, limited to original write-down. |
| Recognition & Disclosure | Expense recognition & required disclosures | Carrying amount expensed when revenue recognised. Disclose policies, carrying amounts, write-downs, reversals, pledged inventories. |
Objective & Scope
Objective (Para 1)
Prescribe accounting treatment for inventories: determine cost, recognise as expense, and assign cost using appropriate formulas.
Full Scope Exclusion (Para 2)
HKAS 2 applies to all inventories except:
- Financial instruments (HKAS 32, HKFRS 9)
- Biological assets & agricultural produce at harvest (HKAS 41)
Measurement Scope Exclusion (Para 3)
Does not apply to measurement of:
- Inventories of producers of agricultural/forest products, minerals โ if measured at NRV per industry practice
- Commodity broker-trader inventories โ if measured at fair value less costs to sell
Definitions
Inventories (Para 6)
Assets:
- Held for sale in ordinary course of business
- In production for such sale
- In form of materials/supplies to be consumed in production or services
Net Realisable Value (NRV) vs Fair Value (Paras 6-7)
| Aspect | Net Realisable Value | Fair Value |
|---|---|---|
| Nature | Entity-specific value | Market-based (not entity-specific) |
| Basis | Expected to realise from sale in ordinary course | Price in orderly transaction in principal market |
| Relationship | May not equal fair value less costs to sell | N/A |
What Inventories Encompass (Para 8)
- Goods purchased and held for resale
- Finished goods or work in progress
- Materials and supplies awaiting use
Measurement of Inventories
Fundamental Principle (Para 9)
This is the core measurement requirement under HKAS 2.
Cost of Inventories
Components of Cost (Para 10)
Cost comprises: costs of purchase + costs of conversion + other costs incurred to bring inventories to present location and condition.
Costs of Purchase (Para 11)
| Included | Deducted |
|---|---|
| Purchase price, import duties, transport, handling | Trade discounts, rebates, other similar items |
Costs of Conversion (Paras 12-14)
- Direct costs: e.g., direct labour
- Production overheads: fixed and variable
Fixed Overheads Allocation (Para 13)
- Based on normal capacity
- Unallocated overheads recognised as expense in period incurred
- In abnormally high production, decrease per-unit allocation
Variable Overheads Allocation (Para 13)
Allocated based on actual use of production facilities.
Other Costs (Paras 15-19)
Included: Costs to bring to present location/condition (e.g., product design for specific customers).
Excluded: Abnormal waste, storage (unless necessary in production), administrative overheads not contributing to location/condition, selling costs.
Cost Formulas
Specific Identification (Para 23)
Used for items not ordinarily interchangeable and goods/services segregated for specific projects.
FIFO and Weighted Average (Para 25)
For all other inventories, use FIFO or weighted average cost formula.
Prohibition of LIFO
Consistency Requirement (Para 25-26)
Use same cost formula for all inventories with similar nature and use. Different formulas may be justified for different nature/use, but not solely due to geographical location or tax rules.
FIFO vs Weighted Average (Para 27)
| Formula | Assumption |
|---|---|
| FIFO | First purchased/produced items sold first; ending inventory = most recent costs |
| Weighted Average | Cost determined from weighted average of beginning and period purchases/production |
Net Realisable Value
When Cost May Not Be Recoverable (Para 28)
- Inventories damaged
- Wholly or partially obsolete
- Selling prices declined
- Estimated costs of completion/sale increased
Write-Down Basis (Para 29)
Write down item by item. Grouping similar items is allowed only if they have similar purposes, are produced/marketed in same area, and cannot be practicably evaluated separately.
Estimates of NRV (Paras 30-31)
- Based on most reliable evidence at time of estimate
- Consider post-period events that confirm conditions existing at period-end
- For firm sales contracts: use contract price
Materials Held for Use (Para 32)
Not written down if finished products expected to sell at or above cost. If finished product cost exceeds NRV, write down materials to NRV (replacement cost may be best measure).
Reversal of Write-Down (Para 33)
Recognition as an Expense & Disclosure
Recognition Rules (Para 34)
- When inventories sold: recognise carrying amount as expense in period revenue is recognised
- Write-downs and losses: recognise as expense in period they occur
- Reversal of write-down: recognise as reduction in inventories expense in period of reversal
Required Disclosures (Para 36)
| Item | Disclosure Requirement |
|---|---|
| (a) | Accounting policies, including cost formula used |
| (b) | Total carrying amount and by classification |
| (c) | Carrying amount at fair value less costs to sell |
| (d) | Amount recognised as expense (cost of sales) |
| (e) | Amount of write-down recognised as expense |
| (f) | Amount of reversal of write-down |
| (g) | Circumstances/events leading to reversal |
| (h) | Carrying amount pledged as security |
Common Classifications (Para 37)
Merchandise, production supplies, materials, work in progress, finished goods.
Cost of Sales Components (Para 38)
Includes: costs previously in inventory now sold, unallocated production overheads, abnormal production costs.
Key Takeaways & Effective Date
Summary Table
| Topic | Key Point |
|---|---|
| Measurement | Lower of cost and NRV |
| Cost Components | Purchase + conversion + other costs to present location/condition |
| Fixed Overhead Allocation | Based on normal capacity; unallocated expensed |
| Cost Formulas | Specific ID (non-interchangeable); FIFO or Weighted Average (others) |
| LIFO | Prohibited |
| NRV Write-Down | Item by item; reverse when circumstances improve (limited to original write-down) |
| Recognition | Carrying amount expensed when revenue recognised; write-downs/losses expensed immediately |
| Disclosure | Policies, carrying amounts by classification, write-downs, reversals, pledged inventories |
| Scope Exclusions | Financial instruments; biological assets; certain agricultural/mineral products (measurement only); broker-trader inventories at FV less costs to sell (measurement only) |
| Deferred Settlement | Financing element recognised as interest expense |
Effective Date (Para 40)
Apply for annual periods beginning on or after 1 January 2005. Earlier application encouraged.
Withdrawal (Para 41)
Supersedes SSAP 22 Inventories (revised 2001).
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