Chapter 9: Disclosure and Presentation

Presentation

IAS 1 requires that when material, the total carrying amount of inventories (other than those included in disposal groups that are classified as held for sale) should be presented as a separate item in the statement of financial position.

Disclosure

Accounting policies

IAS 2 requires that financial statements should disclose the accounting policies adopted in measuring inventories, including the cost formula used.

Analysis of the carrying amount

IAS 2 requires the total carrying amount of inventories to be disclosed, together with an analysis of the carrying amount in a manner appropriate to the entity.

Common classifications of inventories are as follows:

• merchandise;
• production supplies;
• materials;
• work in progress; and
• finished goods.

Entities in specialist industries should use a classification that is meaningful in the context of their operations; for example, property development entities could analyze their development portfolio as:

• land held for development;
• properties under construction; and
• completed properties held for sale.

Expected realization

IAS 2 requires that an entity should disclose for each asset that combines amounts expected to be recovered both within 12 months of and after 12 months from the end of the reporting period, the amount expected to be recovered after more than 12 months. It is appropriate for an entity to disclose the amount of inventories expected to be recovered after more than one year from the end of the reporting period.

Inventories carried at fair value less costs to sell

IAS 2 requires separate disclosure of the carrying amount of inventories carried at fair value less costs to sell.

As discussed, this requirement should in practice apply only to certain inventories held by commodity broker-traders. (When inventories are classified as held for sale as part of a disposal group, they continue to be measured by IAS 2. The disposal group itself may then be written down to fair value less costs to sell, but not the inventories per se.)

Amounts recognized in profit or loss

IAS 2 requires separate disclosure of:

• the number of inventories recognized as an expense during the period;
• the amount of any write-down of inventories to a net realizable value recognized as an expense in the period; and
• the amount of any reversal of any write-down recognized as a reduction in the inventories expense for the period.

In addition, disclosure is required of the circumstances or events that led to any recognized reversal of a write-down of inventories.

IAS 2 specifies that the amount of inventories recognized as an expense during the period, which is commonly described as the cost of sales, consists of:

• the costs that have previously been included in the measurement of inventories that have now been sold;
• unallocated production overheads; and
• abnormal amounts of production costs of inventories.

Inventories pledged as security

IAS 2 requires entities to disclose the carrying amount of inventories pledged as security for liabilities.

How should the reversal of the provision be presented in the financial statements?

Entity C’s management determines that a provision of C12,000 against inventories recorded in previous years should be reversed because of changes in market conditions. The tax rate is 30%. Tax relief is granted in respect of provisions recognized against specific items of inventory.

How should the reversal of the provision be presented in the financial statements?

The reversal of the provision should be included in the cost of sales, as this was the line in the income statement against which the original provision had been charged. The reversal of the provision will increase the entity’s tax charge for the year of C3, 600 (12,000 × 30%). This charge reverses the tax relief received in prior periods. The adjustment to the tax charge should be included in the tax line item in the income statement.

Inventories carried at fair value less costs to sell

The Standard requires disclosure of the carrying amount of inventories carried at fair value less costs to sell.

Write-down of inventories

The Standard requires disclosure of the amount of any write-down of inventories recognized as an expense in the period and eliminates the requirement to disclose the amount of inventories carried at net realizable value.

The financial statements shall disclose:

1. The accounting policies adopted in measuring inventories, including the cost formula used;
2. The total carrying amount of inventories and the carrying amount in classifications appropriate to the entity;
3. The carrying amount of inventories carried at fair value less costs to sell;
4. The amount of inventories recognized as an expense during the period;
5. The amount of any write-down of inventories recognized as an expense in the period;
6. The amount of any reversal of any write-down that is recognized as a reduction in the number of inventories recognized as an expense in the period;
7. The circumstances or events that led to the reversal of a write-down of inventories; and
8. The carrying amount of inventories pledged as security for liabilities.

Information about the carrying amounts held in different classifications of inventories and the extent of the changes in these assets is useful to financial statement users. Common classifications of inventories are merchandise, production supplies, materials, work in progress, and finished goods.

The amount of inventories recognized as an expense during the period, which is often referred to as cost of sales, consists of those costs previously included in the measurement of inventory that has now been sold and unallocated production overheads and abnormal amounts of production costs of inventories. The circumstances of the entity may also warrant the inclusion of other amounts, such as distribution costs.

Some entities adopt a format for profit or loss that results in amounts being disclosed other than the cost of inventories recognized as an expense during the period. Under this format, an entity presents an analysis of expenses using a classification based on the nature of expenses. In this case, the entity discloses the costs recognized as an expense for raw materials and consumables, labor costs, and other costs together with the amount of the net change in inventories for the period.