PWC-ifrs-inventory-2013
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Assets which (1) are held for sale in the ordinary course of business (2) are in the process of production for such sale, or (3)
in the form of materials or supplies to be consumed in the
• Identify the concept of inventory and the types of costs that should be
included in the valuation of inventory • Apply the formulas for measuring inventories under the specific
How much overhead should be allocated to each unit produced?
PwC
10
Capitalization of Borrowing Costs
Certain inventory products require significant manufacturing time. A manufacturer must finance its operating costs during the construction, production or development period. In some cases, the manufacturer will do so by borrowing funds. In these circumstances, both IFRS (IAS 23) and US GAAP (ASC 835-20) indicate that borrowing costs may need to be capitalized as part of the cost of inventory, if it is a qualifying assettion of Borrowing Costs – US GAAP
Under US GAAP (ASC 835-20), capitalization of borrowing costs for qualifying assets
• IFRS 6 – “Exploration for and Evaluation of Mineral Resources” • IAS 23 (revised 2007) (“IAS 23”) – “Borrowing Costs” The primary US GAAP and SEC guidance applicable to inventory accounting includes: •ASC 330-10-30 “ Inventory – Initial Measurement” •ASC 330-10-35 “ Inventory – Subsequent Measurement”
• Describe the key disclosure for inventories under IFRS and US GAAP
PwC 4
The Concept of Inventory
IFRS and US GAAP contain similar definitions of inventory:
IFRS Ready
Inventory
Table of Contents
Module 1 – Introduction and Overview
Module 2 – Measurement of Inventory Costs Module 3 – Measurement of Recoverability
Module 4 – Additional Topics
Module 5 – Summary
PwC
2
Module 1 – Introduction and Overview
PwC
Session Objectives
This session describes the accounting for inventories under International Financial Reporting Standards (IFRS) and United States Generally Accepted Accounting Principles (US GAAP). By the end of this session, you will be able to:
PwC 9
Example 1 – Inventory Cost Components
Assume that a manufacturer normally produces 925 to 1,000 units of a product per operating cycle. During the current operating cycle, (a) 950 units are produced and (b) factory costs totaled $10,000. Assume that the factory only produces one type of product.
• Finished goods
PwC
5
Applicable Authoritative Guidance
The primary IFRS guidance applicable to inventory accounting includes: • IAS 2 - “Inventories”
• IAS 41 - “Agriculture”
- Qualifying assets measured at fair value (e.g., investment properties, biological assets). - Inventories that are routinely manufactured, or otherwise produced in large quantities on a repetitive basis.
• SAB Topic 5-BB – “Inventory Valuation Allowances”
• AICPA LIFO Issues Paper, November 30, 1984
PwC 6
Module 2 – Measurement of Inventory Costs
PwC
Inventory Costs
• ASC 835-20 “ Capitalization of Interest”
• EITF 86-13 – “Recognition of Inventory Market Declines at Interim Reporting Dates” • EITF 02-16 – “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor”
identification, FIFO, average cost, and LIFO methods under IFRS and US GAAP
• Describe how to address the recoverability of inventory under IFRS and US GAAP
Under both IFRS and US GAAP, inventory cost may comprise production and/or acquisition costs.
For example, finished goods inventory cost for manufacturers will often include the cost of raw materials, direct labor applied to those materials, and allocated overhead. For distributors, inventory cost likely will be comprised of the purchase price, as well as any transportation costs paid by the distributor to ship the inventory from the supplier to the distributor’s place of business.
• These indirect costs are referred to as overhead. • Overhead can comprise depreciation and maintenance of factory buildings and equipment, the cost of factory management and administration, electricity, and other similar items. • Overhead should be allocated to inventory based on normal production levels. Normal production refers to a range of production levels expected to be achieved during various cycles or seasons under ordinary circumstances.
production process or in the rendering of services.
Inventories owned by a manufacturing company typically include:
• Raw materials (“RM”) • Work in progress (“WIP”)
PwC
11
Capitalization of Borrowing Costs – IFRS Amendments
Under the amended IAS 23 (affective 1/1/2009), borrowing costs associated with qualifying assets must be capitalized as part of the cost of inventory. A company is not required to apply the standard to:
PwC
8
Inventory Cost Components
An entity should include in inventory the cost of direct labor employed in manufacturing an inventory item.
The amount of labor cost “absorbed” into inventory will be based on (a) the number of labor hours required to produce a product (presuming normal production rates), multiplied by (b) the hourly cost per employee involved with production. An entity should also include in inventory indirect costs associated with the entity’s manufacturing operations.
in the form of materials or supplies to be consumed in the
• Identify the concept of inventory and the types of costs that should be
included in the valuation of inventory • Apply the formulas for measuring inventories under the specific
How much overhead should be allocated to each unit produced?
PwC
10
Capitalization of Borrowing Costs
Certain inventory products require significant manufacturing time. A manufacturer must finance its operating costs during the construction, production or development period. In some cases, the manufacturer will do so by borrowing funds. In these circumstances, both IFRS (IAS 23) and US GAAP (ASC 835-20) indicate that borrowing costs may need to be capitalized as part of the cost of inventory, if it is a qualifying assettion of Borrowing Costs – US GAAP
Under US GAAP (ASC 835-20), capitalization of borrowing costs for qualifying assets
• IFRS 6 – “Exploration for and Evaluation of Mineral Resources” • IAS 23 (revised 2007) (“IAS 23”) – “Borrowing Costs” The primary US GAAP and SEC guidance applicable to inventory accounting includes: •ASC 330-10-30 “ Inventory – Initial Measurement” •ASC 330-10-35 “ Inventory – Subsequent Measurement”
• Describe the key disclosure for inventories under IFRS and US GAAP
PwC 4
The Concept of Inventory
IFRS and US GAAP contain similar definitions of inventory:
IFRS Ready
Inventory
Table of Contents
Module 1 – Introduction and Overview
Module 2 – Measurement of Inventory Costs Module 3 – Measurement of Recoverability
Module 4 – Additional Topics
Module 5 – Summary
PwC
2
Module 1 – Introduction and Overview
PwC
Session Objectives
This session describes the accounting for inventories under International Financial Reporting Standards (IFRS) and United States Generally Accepted Accounting Principles (US GAAP). By the end of this session, you will be able to:
PwC 9
Example 1 – Inventory Cost Components
Assume that a manufacturer normally produces 925 to 1,000 units of a product per operating cycle. During the current operating cycle, (a) 950 units are produced and (b) factory costs totaled $10,000. Assume that the factory only produces one type of product.
• Finished goods
PwC
5
Applicable Authoritative Guidance
The primary IFRS guidance applicable to inventory accounting includes: • IAS 2 - “Inventories”
• IAS 41 - “Agriculture”
- Qualifying assets measured at fair value (e.g., investment properties, biological assets). - Inventories that are routinely manufactured, or otherwise produced in large quantities on a repetitive basis.
• SAB Topic 5-BB – “Inventory Valuation Allowances”
• AICPA LIFO Issues Paper, November 30, 1984
PwC 6
Module 2 – Measurement of Inventory Costs
PwC
Inventory Costs
• ASC 835-20 “ Capitalization of Interest”
• EITF 86-13 – “Recognition of Inventory Market Declines at Interim Reporting Dates” • EITF 02-16 – “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor”
identification, FIFO, average cost, and LIFO methods under IFRS and US GAAP
• Describe how to address the recoverability of inventory under IFRS and US GAAP
Under both IFRS and US GAAP, inventory cost may comprise production and/or acquisition costs.
For example, finished goods inventory cost for manufacturers will often include the cost of raw materials, direct labor applied to those materials, and allocated overhead. For distributors, inventory cost likely will be comprised of the purchase price, as well as any transportation costs paid by the distributor to ship the inventory from the supplier to the distributor’s place of business.
• These indirect costs are referred to as overhead. • Overhead can comprise depreciation and maintenance of factory buildings and equipment, the cost of factory management and administration, electricity, and other similar items. • Overhead should be allocated to inventory based on normal production levels. Normal production refers to a range of production levels expected to be achieved during various cycles or seasons under ordinary circumstances.
production process or in the rendering of services.
Inventories owned by a manufacturing company typically include:
• Raw materials (“RM”) • Work in progress (“WIP”)
PwC
11
Capitalization of Borrowing Costs – IFRS Amendments
Under the amended IAS 23 (affective 1/1/2009), borrowing costs associated with qualifying assets must be capitalized as part of the cost of inventory. A company is not required to apply the standard to:
PwC
8
Inventory Cost Components
An entity should include in inventory the cost of direct labor employed in manufacturing an inventory item.
The amount of labor cost “absorbed” into inventory will be based on (a) the number of labor hours required to produce a product (presuming normal production rates), multiplied by (b) the hourly cost per employee involved with production. An entity should also include in inventory indirect costs associated with the entity’s manufacturing operations.