Comprehensive Summary of AS 2: Valuation of Inventories

1. Key Definitions and Scope

• Definition of Inventory:
  • Inventories include:
    • Items held for sale in ordinary business (e.g., goods purchased by a retailer).
    • Items in production for future sale (work-in-progress).
    • Items consumed in production (e.g., raw materials, maintenance supplies).
  • Inventories exclude:
    • Work-in-progress under construction contracts (covered by AS 7).
    • Service provider work-in-progress (e.g., software, medical services).
    • Financial instruments like shares and debentures held as stock-in-trade.
    • Livestock, agricultural products, minerals measured at net realizable value (NRV).
• Page Reference: Pages 5.2–5.3

2. Measurement of Inventories

• Valuation Rule:
  • Inventories are valued at lower of cost and net realizable value (NRV).
    • Cost: Includes purchase, conversion, and other costs to bring inventory to location and condition.
    • NRV: Estimated selling price minus costs of completion and selling expenses.
  • Example:
    • Partly finished product cost: ₹150
    • Cost to finish: ₹100
    • Selling price: ₹250
    • Brokerage: 4% of selling price = ₹10
    • NRV = ₹250 - ₹100 - ₹10 = ₹140
    • Value = Lower of cost (₹150) and NRV (₹140) = ₹140.
  • Page Reference: Pages 5.4–5.5

3. Costs Included in Inventory Valuation

• Cost Components:
  • Costs of Purchase: Purchase price + duties/taxes (non-recoverable) – discounts/rebates.
  • Costs of Conversion: Direct labor + overheads:
    • Fixed overheads allocated based on normal capacity.
    • Variable overheads based on actual use.
  • Other Costs: Those necessary to bring inventory to condition and location for sale (e.g., custom design costs).
• Page Reference: Pages 5.6–5.7

4. Costs Excluded from Inventory Valuation

• Excluded Costs:
  • Abnormal waste (e.g., labor, materials, production costs).
  • Storage costs (unless necessary in production process).
  • Administrative overheads unrelated to production.
  • Selling and distribution expenses.
  • Example:
    • Abnormal waste of 50 MT charged to Profit & Loss, calculated as:
  • Page Reference: Pages 5.9–5.14

5. Cost Formulas for Inventory Valuation

• Methods:
  • Specific Identification: For unique, non-interchangeable items.
  • First-In-First-Out (FIFO): Assumes oldest items are used/sold first.
  • Weighted Average Cost: Averages cost of items in stock.
• Example:
  • FIFO vs. Weighted Average impacts valuation in price-volatile environments.
• Page Reference: Pages 5.10–5.11

6. Techniques for Cost Measurement

• Standard Costing:
  • Pre-determined costs set based on normal material use, labor efficiency, and capacity.
  • Example:
    • Standard cost for a unit, including material, labor, and overhead, is reviewed and updated periodically.
• Retail Method:
  • For retailers selling items with uniform gross margins:
    • Cost = Selling Price - (Gross Margin % of Selling Price).
• Page Reference: Pages 5.10–5.11

7. Special Considerations

• Joint Products and By-Products:
  • Joint costs allocated based on rational methods (e.g., sales value at split-off point).
  • By-products valued at NRV, reducing the main product's cost.
• Abnormal Waste: Page Reference: Pages 5.7–5.8
  • Abnormal waste costs are charged to the Profit & Loss account, not included in inventory valuation.
• Page Reference: Pages 5.7–5.8

8. Disclosures

• Mandatory Disclosures:
  • Accounting policies for inventory measurement (e.g., FIFO, weighted average).
  • Total carrying amount classified into:
    • Raw materials.
    • Work-in-progress.
    • Finished goods.
    • Stock-in-trade, stores, spares, and others.
  • Disclosures should clarify valuation methods and changes in inventory classification.
• Page Reference: Pages 5.12–5.13

9. Illustrations and Case Studies

• Example: Partly Finished Goods (Page 5.5):
  • Cost: ₹530, Completion Cost: ₹310, Selling Price: ₹750, Brokerage: 4% = ₹30.
  • NRV = ₹750 - ₹310 - ₹30 = ₹410.
  • Value = Lower of Cost (₹530) or NRV (₹410) = ₹410.
• Abnormal Waste (Page 5.14):
  • 150 MT abnormal waste calculated at ₹156.25/MT, charged to P&L = ₹23,437.50.

Note: Page nos reference is from Icai Ca Inter Advanced Accounting Textbook.

Textbook link: https://drive.google.com/file/d/1rTSA27T-UQTQCTEbN4eBgES-2qavlXQ2/view?usp=drivesdk

YouTube Videos for AS 2: Valuation of Inventories:

https://www.youtube.com/watch?v=68RjNrtnMVc

https://www.youtube.com/watch?v=wCl41YC2lqw

https://www.youtube.com/watch?v=kZBJAps5ZzE

Pdf of the above summary: https://drive.google.com/file/d/1rTk9_wuMt8zVKAGII1vWE0VgsTMVVGCS/view?usp=drivesdk

(i) Basis for Applicability of CSR Provisions

As per Section 135(1), the CSR provisions apply to every company meeting at least one of the following thresholds in the immediately preceding financial year:

1. Net Worth: ₹500 crore or more.

2. Turnover: ₹1,000 crore or more.

3. Net Profit: ₹5 crore or more.

Analysis of Herbal Wellness Products Ltd:

Net Worth: ₹510 crore (exceeds ₹500 crore).

Turnover: ₹700 crore (below ₹1,000 crore).

Net Profit: ₹4 crore (below ₹5 crore).

Conclusion: Since the Net Worth exceeds ₹500 crore, CSR provisions are applicable.

(ii) Compliance of CSR Committee Formation

As per Section 135(1) and Companies (CSR Policy) Rules, 2014:

CSR Committee must consist of at least 3 directors, with at least 1 independent director.

Composition of CSR Committee in the Case:

1. CA. R.C Goel (Managing Director)

2. Varun (Director)

3. Prabodh (Director)

4. Vineet (Chief Compliance Officer)

Issues:

No Independent Director is included in the committee, which violates the requirements.

Chief Compliance Officer is included, which is unnecessary.

Conclusion: The CSR committee does not comply with Section 135 and CSR Policy Rules.

(iii) Proposed CSR Activities

Section 135 and CSR Policy Rules specify permissible CSR activities (Schedule VII):

1. Activities for the exclusive benefit of employees and their families are not allowed.

2. Contributions to political parties are prohibited under Section 182.

3. Donations to PM CARES Fund are allowed.

4. Local community initiatives like child and women education are permissible.

Conclusion:

Activities (I) and (II) are non-compliant.

Activities (III) and (IV) are compliant.

Reference: Chapter 9 Accounts of Companies

Page no : 9.46 and 9.47

Note: Page nos reference is from Icai Ca inter Law Textbook.

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