Sri Lanka Accounting Standard – LKAS 2

Inventories
Sri Lanka Accounting Standard LKAS 2 Inventories is set out in paragraphs 1– 40F. All the
paragraphs have equal authority. LKAS 2 should be read in the context of its objective and
the Preface to Sri Lanka Accounting Standards and the Conceptual Framework for Financial
Reporting. LKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
provides a basis for selecting and applying accounting policies in the absence of explicit
guidance.
Objective

The objective of this Standard is to prescribe the accounting treatment for inventories. A
primary issue in accounting for inventories is the amount of cost to be recognised as an asset
and carried forward until the related revenues are recognised. This Standard provides
guidance on the determination of cost and its subsequent recognition as an expense, including
any write-down to net realisable value. It also provides guidance on the cost formulas that are
used to assign costs to inventories.

Definitions

The following terms are used in this Standard with the meanings specified:

Inventories are assets:

(a) held for sale in the ordinary course of business;

(b) in the process of production for such sale; or

(c) in the form of materials or supplies to be consumed in the production process or in the
rendering of services.

Net realisable value 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.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. (See SLFRS 13
Fair Value Measurement.)
Inventories encompass goods purchased and held for resale including, for example,
merchandise purchased by a retailer and held for resale, or land and other property held for
resale. Inventories also encompass finished goods produced, or work in progress being
produced, by the entity and include materials and supplies awaiting use in the production
process. In the case of a service provider, inventories include the costs of the service, as
described in paragraph 19, for which the entity has not yet recognised the related revenue (see
LKAS 18 Revenue).

Cost of inventories

The cost of inventories shall comprise all costs of purchase, costs of conversion and other
costs incurred in bringing the inventories to their present location and condition.

Costs of purchase

The costs of purchase of inventories comprise the purchase price, import duties and other
taxes (other than those subsequently recoverable by the entity from the taxing authorities),
and transport, handling and other costs directly attributable to the acquisition of finished
goods, materials and services. Trade discounts, rebates and other similar items are deducted
in determining the costs of purchase.

Costs of conversion

The costs of conversion of inventories include costs directly related to the units of
production, such as direct labour. They also include a systematic allocation of fixed and
variable production overheads that are incurred in converting materials into finished goods.
Fixed production overheads are those indirect costs of production that remain relatively
constant regardless of the volume of production, such as depreciation and maintenance of
factory buildings and equipment, and the cost of factory management and administration.
Variable production overheads are those indirect costs of production that vary directly, or
nearly directly, with the volume of production, such as indirect materials and indirect labour.

Other costs

Other costs are included in the cost of inventories only to the extent that they are incurred in
bringing the inventories to their present location and condition. For example, it may be
appropriate to include non- production overheads or the costs of designing products for
specific customers in the cost of inventories.
Examples of costs excluded from the cost of inventories and recognised as expenses in the
period in which they are incurred are:

(a) abnormal amounts of wasted materials, labour or other production costs;

(b) storage costs, unless those costs are necessary in the production process before a further
production stage;

(c) administrative overheads that do not contribute to bringing inventories to their present
location and condition; and

(d) selling costs.

Cost formulas

The cost of inventories of items that are not ordinarily interchangeable and goods or services
produced and segregated for specific projects shall be assigned by using specific
identification of their individual costs.

Specific identification of cost means that specific costs are attributed to identified items of
inventory. This is the appropriate treatment for items that are segregated for a specific
project, regardless of whether they have been bought or produced. However, specific
identification of costs is inappropriate when there are large numbers of items of inventory
that are ordinarily interchangeable. In such circumstances, the method of selecting those
items that remain in inventories could be used to obtain predetermined effects on profit or
loss.

The cost of inventories, other than those dealt with in paragraph 23, shall be assigned by
using the first-in, first-out (FIFO) or weighted average cost formula. An entity shall use the
same cost formula for all inventories having a similar nature and use to the entity. For
inventories with a different nature or use, different cost formulas may be justified.

Weighted Average

The weighted average method, which is mainly utilized to assign the average cost of
production to a given product, is most commonly employed when inventory items are so
intertwined that it becomes difficult to assign a specific cost to an individual unit. This is
frequently the case when the inventory items in question are identical to one another.
Furthermore, this method assumes a store sells all of its inventories simultaneously.

To use the weighted average model, one divides the cost of the goods that are available for
sale by the number of those units still on the shelf. This calculation yields the weighted
average cost per unit—a figure that can then be used to assign a cost to both ending inventory
and the cost of goods sold.

First In, First Out (FIFO).

The first in, first out (FIFO) accounting method relies on a cost flow assumption that removes
costs from the inventory account when an item in someone’s inventory has been purchased at
varying costs, over time. When a business uses FIFO, the oldest cost of an item in an
inventory will be removed first when one of those items is sold. This oldest cost will then be
reported on the income statement as part of the cost of goods sold.

Financial notes of Alumex company according to the LKAS 02

(Inventories).

Notes to the Financial Statements Year ended 31 March 2016

Inventories

Inventories are valued at the lower of cost and net realisable value, after making due
allowances for obsolete and slow-moving items. Net realisable value is the price at which
inventories can be sold in the ordinary course of business less the estimated cost of
completion and the estimated cost necessary to make the sale.

The cost incurred in bringing inventories to its present location and conditions are accounted
using the following cost formula: -

Raw Materials At purchase cost on first-in first-out.

Finished Goods and Work- in-progress Manufacturing overheads based on normal

operating capacity, but Excluding Borrowing
Costs.
Consumables and Spares At purchase cost on first-in first-out.
Goods in Transit At purchase cost on first-in first-out.
Notes to the Financial Statements Year ended 31 March 2017.

Inventories

Inventories are valued at the lower of cost or net realizable value, after making due
allowances for obsolete and slow-moving items. Net realizable value is the price
at which inventories can be sold in the ordinary course of business less the
estimated cost of completion and the estimated cost necessary to make the sale.

The cost incurred in bringing inventories to its present location and conditions are
accounted using the following cost formula: -

Raw At purchase cost on first-in

Materials first-out
Finished At the cost of direct materials,
Goods and direct labor and an
appropriate proportion of
Work-in-
Manufacturing overheads
progress based on normal operating
capacity, but Excluding
Borrowing Costs.
Consumables At purchase cost on first-in
and Spares first-out
Goods in At purchase cost on first-in
Transit first-out

Notes to the Financial Statements Year ended 31 March 2018.

Inventories

Group company
2017 2017
Year ended 31 March 2018 2018 2018
RS. 000 RS. 000 RS. 000 RS. 000

raw material 1,046,386 622,442 847,325 497,603

Work in Progress 108,780 70,223 100,180 56,242
finished goods 480,418 314,529 363,043 259,593
other materials 64,229 49,895 49,779 41,281
goods in Transit 87,664 91,990 83,551 53,200
1,787,477 1,149,079 1,443,879 907,919
movement in the provision for obsolete
inventory
As at 1 April
Provision made During the Year 52,573 57,379 39,084 37,017
Provision made During the Year 53,134 10,015 40,349 9,505
Provision reversed During the Year (13,739) (14,821) (5,576 (7,439)
)

As at 31 march 91,968 52,573 73,857 39,083

Notes to the Financial Statements Year ended 31 March 2019.

Inventories

Group company
year ended 31 March 2019 2019 2018 2019 2018
R

Raw Material 771,854 675,608 702,936 564,081

Work In Progress 176,933 156,718 165,937 139,622
Finished Goods 604,945 685,614 537,978 579,297
Other Materials 95,634 122,293 87,296 117,223
Goods In Transit 196,176 215,336 190,585 194,658
1,845,542 1,855,569 1,684,732 1,594,8
81
.

Movement in the Provision for Obsolete Inventory

As at 1 April
Provision Made During the Year 124,191 91,968 94,254 73,856
Provision Made During the Year 79,834 32,223 67,509 21,184

Provision Reversed During the Year (10,689) - (6,131) (786)

As at 31 March 193,336 124,191 155,632 94,254