Provisions, leases, employee benefits and financial instruments
Inventory (IAS 2)
Measurement rule
Inventory is measured at the lower of cost and net realisable value, item by item or by groups of similar items. NRV is the estimated selling price in the ordinary course of business less estimated costs of completion and costs to sell - an entity-specific figure, not fair value.
Cost comprises purchase cost (net of trade discounts and rebates, plus import duties and non-recoverable taxes), conversion cost and other costs incurred to bring inventory to its present location and condition. Conversion cost includes a systematic allocation of fixed production overheads based on normal capacity; unallocated overhead arising from low production is expensed, not capitalised into inventory. Abnormal waste, storage costs (unless necessary in the production process), administrative overheads and selling costs are excluded. Borrowing costs are capitalised only for qualifying assets under IAS 23.
Cost formulas: specific identification for non-interchangeable items; FIFO or weighted average for the rest. LIFO is prohibited. Commodity broker-traders measure at fair value less costs to sell.
Traps
Unlike IAS 36, an inventory write-down is reversed when NRV recovers, but only up to the original write-down. NRV is not fair value less costs of disposal: it also deducts costs of completion. Disclose carrying amounts, write-downs and reversals by class.
Worked example
Normal capacity 10,000 units; fixed overheads CU50,000; actual output 8,000 units. Overhead per unit is CU5. Inventory absorbs 8,000 × CU5 = CU40,000 and the CU10,000 unallocated overhead is expensed. Rule of thumb: low production never inflates unit cost.
Provisions, Leases, Employee Benefits and Financial Instruments
Provisions and contingencies (IAS 37)
Recognise when a present obligation (legal or constructive) from a past event exists, an outflow is probable and a reliable estimate is possible. Measure at the best estimate of the expenditure required to settle, discounted where material using a pre-tax rate reflecting current risks. Restructuring requires a detailed formal plan and a valid expectation raised in those affected. Onerous contracts are provided at the lower of the cost of fulfilment and compensation for non-fulfilment. Reimbursements are a separate asset recognised only when virtually certain. Contingent liabilities are disclosed, not recognised.
Leases (IFRS 16)
A lessee recognises a right-of-use asset and a lease liability at the present value of lease payments, discounted at the rate implicit in the lease or the incremental borrowing rate. Exemptions exist for short-term and low-value leases. Lessors classify leases as finance (net investment) or operating. In a sale-and-leaseback, only the gain relating to rights transferred is recognised.
Employee benefits (IAS 19)
Defined contribution: expense equals the contribution. Defined benefit: net liability is the present value of the obligation less the fair value of plan assets; service cost and net interest go to profit or loss; remeasurements go to OCI and are never recycled.
Financial instruments (IFRS 9)
Classify financial assets on the business model and the contractual cash flow (SPPI) test into amortised cost, FVOCI or FVTPL; expected credit losses apply from initial recognition. Transaction costs are expensed for FVTPL instruments and included in initial carrying amount otherwise.
Worked example
Lease payments of CU10,000 annually for five years, first payment in arrears, incremental borrowing rate 6%: the liability is the present value of the annuity (about CU42,100), not the undiscounted CU50,000.