INVENTORIES

Tugbo, Brian C.

A Comparison between IFRS for SMEs and

Full IFRS

TUGBO, Brian C.
3A2
INVENTORIES
A. Similarities and Differences
Definition

Scope

Initial
Recognition

Initial
Measurement

IFRS for SMEs

Inventories are assets:
Held for sale in the ordinary course
of business or in the process of production for
such sale.
In the form of materials or supplies that are
intended to be consumed in the production
process or in the rendering of
services.
[IFRS for SMEs 13.1]
Included in the scope are work in progress
under financial instruments, biological assets,
construction contracts and produce from
agriculture.
The following are also included:
Producers of agricultural, forest
and mineral products, to the extent
that they are measured at fair value
less costs to sell through profit or
loss.
Commodity brokers and dealers
who measure their inventories at fair
value less costs to sell through profit
or loss.
[IFRS for SMEs 13.2-13.3]
Inventories are initially recognized at cost.
The cost of inventories incorporates:

Full IFRS
Same as IFRS for SMEs.
[IAS 2.6]

Same as IFRS for SMEs.

[IAS 2.2-2.3]

Same as IFRS for SMEs;

however, IAS
2 refers to net realizable
value.
[IAS 2.9-2.10]

a. Cost of purchases
b. Conversion costs
c. Other costs incurred in bringing the
inventories to their present location
(e.g. Freight-in costs)
[IFRS for SMEs 13.4-13.5
Inventories are then valued at
Same as IFRS for SMEs;
the lower of cost and selling price less
however, IAS
costs to complete and sell (LCNRV).
2 refers to net realizable

Subsequent
Measurement

Impairment

Inventories are then evaluated for impairment

at each reporting date:
The selling price (less costs to
complete and sell) is reassessed in
each subsequent period to
determine if the impairment losses
that is previously recognized
should be reversed.
[IFRS for SMEs 27.2-27.4]

Classification:
Costs of
Cost of purchase of inventories
Purchase
Includes:
1. the purchase price,
2. import duties (tax collected on
import)
3. non-refundable taxes
4. transport and handling costs
5. any other directly attributable costs
less trade discounts, rebates and
similar items.
[IFRS for SMEs 13.6]
Costs of
Costs of conversion of inventories
Conversion
include
1. direct labor
2. incurred fixed and variable overhead
(actual overhead)
[IFRS for SMEs 13.8]
Other costs
Borrowing costs (e.g. interest expenses) is
recognized as period cost and not
inventoriable.
[IFRS for SMEs 25.2]

Cost
formulas

value.
[IAS 2.9-2.10]
Same as IFRS for SMEs;
however, IAS
2 refers to net realizable
value.
[IAS 2.9-2.10]
Same as IFRS for SMEs;
however, IAS
2 refers to net realizable
value.
[IAS 2.28-2.33]

Same as IFRS for SMEs.

[IAS 2.11]

Same as IFRS for SMEs.

[IAS 2.12]

Borrowing
costs
are
included in the cost of
inventories under limited
circumstances as illustrated in
IAS 23.
[IAS 2.17]
First-in, first-out (FIFO) or weighted Same as IFRS for SMEs.
average cost formula is used for [IAS 2.25]
assigning the cost of inventories.

Inventory
Estimation
Methods

Disclosure
Requirement
s

Last-in, last-out (LIFO) is not

permitted.
The same cost formula is used for all
inventories with similar nature and use
to the entity.
A different cost formula may be
implemented to inventories with
different nature or use
[IFRS for SMEs 13.17-13.18]
An entity may use techniques for measuring
the cost of inventories if the results are needed
in an estimated manner.
The accepted techniques are:
Standard cost method (Gross Profit Method)
Retail method.
Most recent purchase price.
[IFRS for SMEs 13.16]
Less disclosure is required

Similar to IFRS for SMEs,

the most recent purchase
price is not mentioned
as an example.
[IAS 2.21]

More comprehensive
disclosure

B. Illustration:
Problem A.
Assuming the entity is an example of a small/medium enterprise (SME):
On December 28, 2016, The Natalie Dormer Company purchased goods costing P1 000 000. The
terms were FOB Destination.
The following costs were incurred in connection with the sale and delivery of goods:
Packaging for shipment
Shipping
Special Handling Charges
Interest incurred on purchase of goods

P20 000
30 000
40 000
25 000

These goods were received on December 31, 2016.

Answer: P1 000 000
Under FOB Destination terms of shipment, all cost incurred in transporting the goods to the
buyers place shall be borne by the seller. Hence, only the invoice price of P 1 000 000 shall be
paid by the buyer which shall be the basis of the inventory cost.
Moreover, interest incurred on purchase of goods is not capitalized on SMEs.

Assuming the entity is an example of a large enterprise:

Answer: P1 025 000
Under IAS 23, interest incurred on purchase of goods is part of cost of inventory.

C. Sample Disclosure
Prior to 1 January 2009, the cost of inventories was determined on the weighted average basis.
Raw materials and purchased finished goods are valued at production cost. Work in progress and
manufactured finished goods are valued at production cost.
The directors consider that the change to the first-in, first-out method gives a fairer presentation
of the results and the financial position of the Company. This change in accounting policy has
been accounted for retrospectively and the relevant effect of this change is shown below:
Effects on retained earnings:

2009

2008

RM

RM

As previously stated

150,000

95,000

Effects of change in accounting policy

(15,000)

(10,000)

As restated

135,000

85,000

Net profit before change in accounting policy

100,000

20,000

Effects of change in accounting policy

(10,000)

(5,000)

At 1 January:-

Effects on net profit for the year:

Net profit for the year

90,000

15,000

Comparative amount for inventories of the Company has been restated as follows:
Inventories amount as at 31 December 2008

As previously stated

Effects of change in accounting policy

As restated
References:
An executive guide to IFRS: content, costs and benefits to business
Walton, Peter J.
Chichester, West Sussex, UK : Wiley, 2011.
HF5626 .W177 2011

RM

50,000

(15,000)

35,000