Abstract: International Financial Reporting Standards Essay Example

the cost to be recognized as an asset and carried forward until the associated revenues are recognized. This Standard offers guidance on how to determine cost and recognize it as an expense, including any write-down to net realizable value. It also provides guidance on the cost formulas used to assign costs to inventories. Inventories include assets held for sale (finished goods), assets in the production process for sale (work in process), and materials and supplies consumed in production (raw materials). [AS 2]

6]3 However, AS 2 does not include certain inventories. These exclusions are: [AS 2. 2] work in process arising under construction contracts (please refer to AS 11 Construction Contracts)4 financial instruments (please refer to AS 39 Financial Instruments: Recognition and Measurement) biological assets related to agricultural activity and agricultural produce at the point of harvest (please refer to AS 41 Agriculture). Additionally, while the following are part of the standard's scope, AS 2 does not apply to the measurement of inventories held by: [AS 2. 3] producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, if they are measured at net realizable value (above or below cost) based on established practices in those industries.

When inventories are valued at net realizable value, any changes in value are recognized as profit or loss in the period of the change. This rule also applies to brokers and dealers who value their inventories at fair value less costs to sell. If inventories are valued at fair value less costs to sell, any changes in this fair value less costs to sell are recognized as profit or loss in the period of

the change. The following key terms with specified meanings are used in this Standard: Inventories refer to assets held for sale, assets being produced for sale, or materials/supplies consumed during production process or service provision.

Net realizable value is the estimated selling price in the ordinary course of business, minus the estimated costs of completion and accessory to make the sale. Fair value represents the amount at which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. The fundamental principle of AS 2 is that inventories should be reported at the lower of cost and net realizable value (NOR). [AS 2.

The estimated selling price in the ordinary course of business, minus the estimated costs of completion necessary to make the sale, is known as net realizable value. When measuring the cost of inventories, it is important to include all costs of purchase (such as taxes, transport, and handling), after subtracting trade discounts achieved. Additionally, costs of conversion (including fixed and variable manufacturing overheads) and other expenses incurred in bringing the inventories to their current location and condition should also be considered.

Inventory is an essential item listed in a company's balance sheet that plays a crucial role in its operations. Accurately measuring and recording inventory value is critical for determining the precise cost of goods sold. This determination ultimately impacts a firm's net income. According to ASSAI guidelines, inventories are measured at either cost or net realizable value – whichever is lower.

To properly prepare inventories for trade, it is crucial to take into account all expenses incurred. These expenses encompass both direct and indirect costs, along with

any costs linked to decommissioning and restoring inventory production (AS 2, 'ASP 2010). AS 2 outlines various advantages of adopting this standard when evaluating inventories. These advantages span different areas like costing methods and inventory valuation methods. Now, let's explore some of these benefits.

When examining the pros and cons of determining inventory costs under FIRS, it is crucial to assess the employed methods. These methods comprise First-in, first-out (FIFO) and the Weighted average method. However, it is important to note that Dolomite 2004 and Mira et al 2008 have prohibited the use of the last-in, first-out (LIFO) method. In contrast, US GAP permits using the same methods as FIRS but also allows for LIFO. Nevertheless, AS 2 does not authorize utilizing LIFO.

However, companies that follow the U.S. Generally Accepted Accounting Principles (GAAP) must use the first-in, first-out (FIFO) method for inventory valuation if they are using the last-in, first-out (LIFO) method. This allows for adjustments in financial reports to make it easier to compare companies that use LIFO with those that use FIFO.

Taking into consideration the mentioned requirements, John Deere's Group inventory value for the year ending October 31, 2009 using the FIFO method is $3,764 million, while the value using the LIFO method is $2,397 million (Cohn Deere group annual report 2009 p,50).

The other costing methods used are absorption costing and marginal costing. The background of each method and their critique on implementation as per AS 2 is discussed.

The concept of fair value is becoming more important in financial reporting, supported by SAAB, standard-setters, and regulators in various countries including ELI. However, the definition and application of fair value in IAC standards have been

inconsistent and lacking a rigorous analytical foundation. AS GAP defines fair value as the current economic value to the existing owner. While alternative measures can serve as proxies for current economic value, SAAB should urgently explore the implications of using these alternative proxies.

The notion of fair value itself is not a practical measure. However, adhering to the concept of fair values requires a comparative evaluation of different concepts for income measurement and asset valuation, for practical reasons. The definition of fair value for inventories, as stated in paragraph 6 of AS 2, is as follows: "Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction."

How does the fair value accounting method work? Fair value does not conform to a single concept. The foundation of fair value is that an asset or liability is valued based on what it can be exchanged for between well-informed and independent parties involved in the transaction. The most reliable indication of fair value is the quoted price on an active market.

However, not all assets have a quoted price on an active market. In cases where there is no active market, the last transaction can be considered for indication, but only if the economic situation has remained unchanged. Alternatively, valuation techniques can be employed to determine the value. Other conceptions of fair value include value in use and replacement value.