HKAS2 Inventories
HKAS2(March2004)
Hong Kong Accounting Standard2
Inventories
HKAS2(March2004December2007) Contents
Hong Kong Accounting Standard2
Inventories
paragraphs OBJECTIVE1 SCOPE2-5 DEFINITIONS6-8 MEASUREMENT OF INVENTORIES9-33 Cost of Inventories10-22 Costs of Purchase11 Costs of Conversion12-14 Other Costs15-18 Cost of Inventories of a Service Provider19 Cost of Agricultural Produce Harvested from Biological Assets20 Techniques for the Measurement of Cost21-22 Cost Formulas23-27 Net Realisable Value28-33 RECOGNITION AS AN EXPENSE34-35 DISCLOSURE36-39 EFFECTIVE DATE40-40A WITHDRAWAL OF OTHER PRONOUNCEMENTS41-42
APPENDIX:
Comparison with International Accounting Standards
Amendments to Other Pronouncements
Amendments resulting from other HKFRSs
BASIS FOR CONCLUSIONS
TABLE OF CONCORDANCE
Hong Kong Accounting Standard2Inventories(IAS2) is set out in paragraphs1-42and the Appendix.All the paragraphs have equal authority.HKAS2should be read in the context of its objective and the Basis for Conclusions,the Preface to Hong Kong Financial Reporting Standards and the Framework for the Preparation and Presentation of Financial Statements. HKAS8Accounting Policies,Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.
Hong Kong Accounting Standard2
Inventories
Objective
1.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. Scope
2.This Standard applies to all inventories,except:
(a)work in progress arising under construction contracts,including directly
related service contracts(see HKAS11Construction Contracts);
(b)financial instruments;and
(c)biological assets related to agricultural activity and agricultural produce at
the point of harvest(see HKAS41Agriculture).
3.This Standard does not apply to the measurement of inventories held by:
(a)producers of agricultural and forest products,agricultural produce after
harvest,and minerals and mineral products,to the extent that they are
measured at net realisable value in accordance with well-established
practices in those industries.When such inventories are measured at net
realisable value,changes in that value are recognised in profit or loss in
the period of the change.
(b)commodity broker-traders who measure their inventories at fair value less
costs to sell.When such inventories are measured at fair value less costs to
sell,changes in fair value less costs to sell are recognised in profit or loss in
the period of the change.
4.The inventories referred to in paragraph3(a)are measured at net realisable value at
certain stages of production.This occurs,for example,when agricultural crops have
been harvested or minerals have been extracted and sale is assured under a forward
contract or a government guarantee,or when an active market exists and there is a
negligible risk of failure to sell.These inventories are excluded from only the
measurement requirements of this Standard.
5.Broker-traders are those who buy or sell commodities for others or on their own
account.The inventories referred to in paragraph3(b)are principally acquired with
the purpose of selling in the near future and generating a profit from fluctuations in
price or broker-traders’margin.When these inventories are measured at fair value
less costs to sell,they are excluded from only the measurement requirements of this
Standard.
Definitions
6.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 amount for which an asset could be exchanged,or a liability
settled,between knowledgeable,willing parties in an arm’s length transaction.
https://www.sodocs.net/doc/613302231.html, realisable value refers to the net amount that an entity expects to realise from the
sale of inventory in the ordinary course of business.Fair value reflects the amount for which the same inventory could be exchanged between knowledgeable and willing
buyers and sellers in the marketplace.The former is an entity-specific value;the latter is https://www.sodocs.net/doc/613302231.html, realisable value for inventories may not equal fair value less costs to sell.
8.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 paragraph19,for which the entity has not yet recognised the related revenue(see HKAS18Revenue).
Measurement of Inventories
9.Inventories shall be measured at the lower of cost and net realisable value.
Cost of Inventories
10.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
11.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
12.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.
13.The allocation of fixed production overheads to the costs of conversion is based on
the normal capacity of the production facilities.Normal capacity is the production
expected to be achieved on average over a number of periods or seasons under normal circumstances,taking into account the loss of capacity resulting from planned
maintenance.The actual level of production may be used if it approximates normal
capacity.The amount of fixed overhead allocated to each unit of production is not
increased as a consequence of low production or idle plant.Unallocated overheads
are recognised as an expense in the period in which they are incurred.In periods of
abnormally high production,the amount of fixed overhead allocated to each unit of
production is decreased so that inventories are not measured above cost.Variable
production overheads are allocated to each unit of production on the basis of the
actual use of the production facilities.
14.A production process may result in more than one product being produced
simultaneously.This is the case,for example,when joint products are produced or
when there is a main product and a by-product.When the costs of conversion of each product are not separately identifiable,they are allocated between the products on a
rational and consistent basis.The allocation may be based,for example,on the
relative sales value of each product either at the stage in the production process when the products become separately identifiable,or at the completion of production.Most by-products,by their nature,are immaterial.When this is the case,they are often
measured at net realisable value and this value is deducted from the cost of the main
product.As a result,the carrying amount of the main product is not materially
different from its cost.
Other Costs
15.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.
16.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.
17.HKAS23Borrowing Costs identifies limited circumstances where borrowing costs
are included in the cost of inventories..
18.An entity may purchase inventories on deferred settlement terms.When the
arrangement effectively contains a financing element,that element,for example a
difference between the purchase price for normal credit terms and the amount paid,is recognised as interest expense over the period of the financing.
Cost of Inventories of a Service Provider
19.To the extent that service providers have inventories,they measure them at the costs
of their production.These costs consist primarily of the labour and other costs of
personnel directly engaged in providing the service,including supervisory personnel, and attributable https://www.sodocs.net/doc/613302231.html,bour and other costs relating to sales and general
administrative personnel are not included but are recognised as expenses in the period in which they are incurred.The cost of inventories of a service provider does not
include profit margins or non-attributable overheads that are often factored into prices charged by service providers.
Cost of Agricultural Produce Harvested from Biological Assets
20.In accordance with HKAS41Agriculture,inventories comprising agricultural
produce that an entity has harvested from its biological assets are measured on initial recognition at their fair value less estimated point-of-sale costs at the point of harvest.
This is the cost of the inventories at that date for application of this Standard. Techniques for the Measurement of Cost
21.Techniques for the measurement of the cost of inventories,such as the standard cost
method or the retail method,may be used for convenience if the results approximate
cost.Standard costs take into account normal levels of materials and supplies,labour, efficiency and capacity utilisation.They are regularly reviewed and,if necessary,
revised in the light of current conditions.
22.The retail method is often used in the retail industry for measuring inventories of
large numbers of rapidly changing items with similar margins for which it is
impracticable to use other costing methods.The cost of the inventory is determined
by reducing the sales value of the inventory by the appropriate percentage gross
margin.The percentage used takes into consideration inventory that has been marked down to below its original selling price.An average percentage for each retail
department is often used.
Cost Formulas
23.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.
24.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.
25.The cost of inventories,other than those dealt with in paragraph23,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.
26.For example,inventories used in one business segment may have a use to the entity
different from the same type of inventories used in another business segment.
However,a difference in geographical location of inventories(or in the respective tax rules),by itself,is not sufficient to justify the use of different cost formulas.
27.The FIFO formula assumes that the items of inventory that were purchased or
produced first are sold first,and consequently the items remaining in inventory at the
end of the period are those most recently purchased or produced.Under the weighted
average cost formula,the cost of each item is determined from the weighted average
of the cost of similar items at the beginning of a period and the cost of similar items
purchased or produced during the period.The average may be calculated on a
periodic basis,or as each additional shipment is received,depending upon the
circumstances of the entity.
Net Realisable Value
28.The cost of inventories may not be recoverable if those inventories are damaged,if
they have become wholly or partially obsolete,or if their selling prices have declined.
The cost of inventories may also not be recoverable if the estimated costs of
completion or the estimated costs to be incurred to make the sale have increased.The
practice of writing inventories down below cost to net realisable value is consistent
with the view that assets should not be carried in excess of amounts expected to be
realised from their sale or use.
29.Inventories are usually written down to net realisable value item by item.In some
circumstances,however,it may be appropriate to group similar or related items.This
may be the case with items of inventory relating to the same product line that have
similar purposes or end uses,are produced and marketed in the same geographical
area,and cannot be practicably evaluated separately from other items in that product
line.It is not appropriate to write inventories down on the basis of a classification of
inventory,for example,finished goods,or all the inventories in a particular industry
or geographical segment.Service providers generally accumulate costs in respect of
each service for which a separate selling price is charged.Therefore,each such
service is treated as a separate item.
30.Estimates of net realisable value are based on the most reliable evidence available at
the time the estimates are made,of the amount the inventories are expected to realise.
These estimates take into consideration fluctuations of price or cost directly relating
to events occurring after the end of the period to the extent that such events confirm
conditions existing at the end of the period.
31.Estimates of net realisable value also take into consideration the purpose for which
the inventory is held.For example,the net realisable value of the quantity of
inventory held to satisfy firm sales or service contracts is based on the contract price.
If the sales contracts are for less than the inventory quantities held,the net realisable
value of the excess is based on general selling prices.Provisions may arise from firm sales contracts in excess of inventory quantities held or from firm purchase contracts.
Such provisions are dealt with under HKAS37Provisions,Contingent Liabilities and Contingent Assets.
32.Materials and other supplies held for use in the production of inventories are not
written down below cost if the finished products in which they will be incorporated
are expected to be sold at or above cost.However,when a decline in the price of
materials indicates that the cost of the finished products exceeds net realisable value, the materials are written down to net realisable value.In such circumstances,the
replacement cost of the materials may be the best available measure of their net
realisable value.
33.A new assessment is made of net realisable value in each subsequent period.When
the circumstances that previously caused inventories to be written down below cost
no longer exist or when there is clear evidence of an increase in net realisable value
because of changed economic circumstances,the amount of the write-down is
reversed(ie the reversal is limited to the amount of the original write-down)so that
the new carrying amount is the lower of the cost and the revised net realisable value.
This occurs,for example,when an item of inventory that is carried at net realisable
value,because its selling price has declined,is still on hand in a subsequent period
and its selling price has increased.
Recognition as an Expense
34.When inventories are sold,the carrying amount of those inventories shall be
recognised as an expense in the period in which the related revenue is recognised.
The amount of any write-down of inventories to net realisable value and all losses
of inventories shall be recognised as an expense in the period the write-down or
loss occurs.The amount of any reversal of any write-down of inventories,arising
from an increase in net realisable value,shall be recognised as a reduction in the
amount of inventories recognised as an expense in the period in which the reversal occurs.
35.Some inventories may be allocated to other asset accounts,for example,inventory
used as a component of self-constructed property,plant or equipment.Inventories
allocated to another asset in this way are recognised as an expense during the useful
life of that asset.
Disclosure
36.The financial statements shall disclose:
(a)the accounting policies adopted in measuring inventories,including the
cost formula used;
(b)the total carrying amount of inventories and the carrying amount in
classifications appropriate to the entity;
(c)the carrying amount of inventories carried at fair value less costs to sell;
(d)the amount of inventories recognised as an expense during the period;
(e)the amount of any write-down of inventories recognised as an expense in
the period in accordance with paragraph34;
(f)the amount of any reversal of any write-down that is recognised as a
reduction in the amount of inventories recognised as expense in the period
in accordance with paragraph34;
(g)the circumstances or events that led to the reversal of a write-down of
inventories in accordance with paragraph34;and
(h)the carrying amount of inventories pledged as security for liabilities.
https://www.sodocs.net/doc/613302231.html,rmation 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 inventories of a service provider may be described as work in progress.
38.The amount of inventories recognised 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.
39.Some entities adopt a format for profit or loss that results in amounts being disclosed
other than the cost of inventories recognised 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 recognised as an
expense for raw materials and consumables,labour costs and other costs together
with the amount of the net change in inventories for the period.
Effective Date
40.An entity shall apply this Standard for annual periods beginning on or after1
January2005.Earlier application is encouraged.If an entity applies this Standard for a period beginning before1January2005,it shall disclose that fact.
40A.If an entity decides to apply this Standard for an earlier period,it is not required to apply all the HKASs with the effective date for that same period.However,it is
required to apply the amendments set out in the appendix on amendments to other pronouncements for that earlier period.
Withdrawal of Other Pronouncements
41.This Standard supersedes SSAP22Inventories,revised in2001.
42.[Not used]
Appendix
Comparison with International Accounting Standards
This comparison appendix,which was prepared as at9March2004and deals only with significant differences in the standards extant,is produced for information only and does not form part of the standards in HKAS2.
The International Accounting Standard comparable with HKAS2is IAS2Inventories. There are no major textual differences between HKAS2and IAS2.
HKAS2(March2004December2007) Appendix
Amendments to Other Pronouncements
The amendments in this appendix shall be applied for annual periods beginning on or after1 January2005.If an entity applies this Standard for an earlier period,these amendments shall be applied for that earlier period
***
The amendments contained in this appendix when this Standard was issued have been incorporated into the relevant Standards.
.
As explained in the introduction to this Standard,the accounting standard and paragraph references that appear below may differ from those found in the existing SSAPs as they have taken into account the changes to be made to the name,number,paragraph numbering as well as appendix referencing of the existing SSAPs in order to conform to those of the equivalent IASs.
A1.In HKAS14Segment Reporting,paragraph22is amended to read as follows:
22.Some guidance for cost allocation can be found in other Standards.For
example,paragraphs11-20of HKAS2Inventories provide guidance on
attributing and allocating costs to inventories,and paragraphs16-21of
HKAS11Construction Contracts provide guidance on attributing and
allocating costs to contracts.That guidance may be useful in attributing or
allocating costs to segments.
A2.In HKAS34Interim Financial Reporting,paragraphs25and27of Appendix B and paragraph1of Appendix C are amended to read as follows:
Appendix B
Inventories
25.Inventories are measured for interim financial reporting by the same
principles as at financial year-end.HKAS2Inventories establishes standards
for recognising and measuring inventories.Inventories pose particular
problems at any financial reporting date because of the need to determine
inventory quantities,costs,and net realisable values.Nonetheless,the same
measurement principles are applied for interim inventories.To save cost and
time,entities often use estimates to measure inventories at interim dates to a
greater extent than at annual reporting dates.Following are examples of how
to apply the net realisable value test at an interim date and how to treat
manufacturing variances at interim dates.
27.[Deleted]
Appendix C
1.Inventories:Full stock-taking and valuation procedures may not be required
for inventories at interim dates,although it may be done at financial year-end.
It may be sufficient to make estimates at interim dates based on sales
margins.
A3.[Not used]
A4.[Not used]
HKAS2(December2007) Appendix
Amendments resulting from other HKFRSs
The following sets out amendments required for this Standard resulting from other newly issued HKFRSs that are not yet effective.Once effective,the amendments set out below will be incorporated into the text of this Standard and this appendix will be deleted.In the amended paragraphs shown below,new text is underlined and deleted text is struck through. HKFRS8Operating Segments(issued in March2007)-effective for annual periods beginning on or after1January 2009
Paragraphs26and29are amended as follows:
26For example,inventories used in one business operating segment may have a use to the entity different from the same type of inventories used in another
business operating segment.However,a difference in geographical location
of inventories(or in the respective tax rules),by itself,is not sufficient to
justify the use of different cost formulas.
29Inventories are usually written down to net realisable value item by item.In some circumstances,however,it may be appropriate to group similar or
related items.This may be the case with items of inventory relating to the
same product line that have similar purposes or end uses,are produced and
marketed in the same geographical area,and cannot be practicably evaluated
separately from other items in that product line.It is not appropriate to write
inventories down on the basis of a classification of inventory,for example,
finished goods,or all the inventories in a particular industry or geographical
operating segment.Service providers generally accumulate costs in respect of
each service for which a separate selling price is charged.Therefore,each
such service is treated as a separate item.
Basis for Conclusions
This Basis for Conclusions accompanies,but is not part,of HKAS2.
HKAS2is based on IAS2,Inventories.In approving HKAS2,the Council of the Hong Kong Society of Accountants considered and agreed with the IASB’s basis for conclusions on IAS2(as revised2003).Accordingly,there are no significant differences between HKAS2 and IAS2.The IASB’s basis for conclusions is reproduced below for reference.The paragraph numbers of IAS2referred to below generally correspond with those in HKAS2. Introduction
BC1.This Basis for Conclusions summarises the International Accounting Standards Board’s considerations in reaching its conclusions on revising IAS2Inventories in
2003.Individual Board members gave greater weight to some factors than to others. BC2.In July2001the Board announced that,as part of its initial agenda of technical projects,it would undertake a project to improve a number of Standards,including
IAS2.The project was undertaken in the light of queries and criticisms raised in
relation to the Standards by securities regulators,professional accountants and other
interested parties.The objectives of the Improvements project were to reduce or
eliminate alternatives,redundancies and conflicts within Standards,to deal with some convergence issues and to make other improvements.In May2002the Board
published its proposals in an Exposure Draft of Improvements to International
Accounting Standards,with a comment deadline of16September2002.The Board
received over160comment letters on the Exposure Draft.
BC3.Because the Board’s intention was not to reconsider the fundamental approach to the accounting for inventories established by IAS2,this Basis for Conclusions does not
discuss requirements in IAS2that the Board has not reconsidered.
Scope
Reference to historical cost system
BC4.Both the objective and the scope of the previous version of IAS2referred to“the accounting treatment for inventories under the historical cost system.”Some had
interpreted those words as meaning that the Standard applied only under a
historical cost system and permitted entities the choice of applying other
measurement bases,for example fair value.
BC5.The Board agreed that those words could be seen as permitting a choice,resulting in inconsistent application of the Standard.Accordingly,it deleted the words“in
the context of the historical cost system in accounting for inventories”to clarify
that the Standard applies to all inventories that are not specifically exempted from its scope.
Inventories of broker-traders
BC6.The Exposure Draft proposed excluding from the scope of the Standard inventories of non-producers of agricultural and forest products and mineral ores
to the extent that these inventories are measured at net realisable value in
accordance with well-established industry practices.However,some respondents
disagreed with this scope exemption for the following reasons:
(a)the scope exemption should apply to all types of inventories of
broker-traders;
(b)established practice is for broker-traders to follow a mark-to-market approach
rather than to value these inventories at net realisable value;
(c)the guidance on net realisable value in IAS2is not appropriate for the
valuation of inventories of broker-traders.
BC7.The Board found these comments persuasive.Therefore it decided that the Standard should not apply to the measurement of inventories of:
(a)producers of agricultural and forest products,agricultural produce after
harvest,and minerals and mineral products,to the extent that they are
measured at net realisable value(as in the previous version of IAS2),or
(b)commodity broker-traders when these inventories are measured at fair value
less costs to sell.
BC8.The Board further decided that the measurement of the effect of inventories on profit or loss for the period needed to be consistent with the measurement attribute of
inventories for which such exemption is allowed.Accordingly,to qualify under(a)or
(b),the Standard requires changes in the recognised amount of inventories to be
included in profit or loss for the period.The Board believes this is particularly
appropriate in the case of commodity broker-traders because they seek to profit from fluctuations in prices and trade margins.
Cost Formulas
BC9.The combination of the previous version of IAS2and SIC-1Consistency—Different Cost Formulas for Inventories allowed some choice between first-in,first-out(FIFO) or weighted average cost formulas(benchmark treatment)and the last-in,first-out
(LIFO)method(allowed alternative treatment).The Board decided to eliminate the
allowed alternative of using the LIFO method.
BC10.The LIFO method treats the newest items of inventory as being sold first,and consequently the items remaining in inventory are recognised as if they were the
oldest.This is generally not a reliable representation of actual inventory flows.
BC11.The LIFO method is an attempt to meet a perceived deficiency of the conventional accounting model(the measurement of cost of goods sold expense by reference to
outdated prices for the inventories sold,whereas sales revenue is measured at current prices).It does so by imposing an unrealistic cost flow assumption.
BC12.The use of LIFO in financial reporting is often tax-driven,because it results in cost of goods sold expense calculated using the most recent prices being deducted from
revenue in the determination of the gross margin.The LIFO method reduces
(increases)profits in a manner that tends to reflect the effect that increased(decreased) prices would have on the cost of replacing inventories sold.However,this effect
depends on the relationship between the prices of the most recent inventory
acquisitions and the replacement cost at the end of the period.Thus,it is not a truly
systematic method for determining the effect of changing prices on profits.
BC13.The use of LIFO results in inventories being recognised in the balance sheet at amounts that bear little relationship to recent cost levels of inventories.However,
LIFO can distort profit or loss,especially when‘preserved’older‘layers’of
inventory are presumed to have been used when inventories are substantially reduced.
It is more likely in these circumstances that relatively new inventories will have been
used to meet the increased demands on inventory.
BC14.Some respondents argued that the use of LIFO has merit in certain circumstances because it partially adjusts profit or loss for the effects of price changes.The Board
concluded that it is not appropriate to allow an approach that results in a measurement of profit or loss for the period that is inconsistent with the measurement of inventories for balance sheet purposes.
BC15.Other respondents argued that in some industries,such as the oil and gas industry, inventory levels are driven by security considerations and often represent a minimum
of90days of sales.They argue that,in these industries,the use of LIFO better
reflects an entity’s performance because inventories held as security stocks are closer
to long-term assets than to working capital.
BC16.The Board was not convinced by these arguments because these security stocks do not match historical layers under a LIFO computation.
BC17.Other respondents argued that in some cases,for example,when measuring coal dumps,piles of iron or metal scraps(when stock bins are replenished by‘topping up’), the LIFO method reflects the actual physical flow of inventories.
BC18.The Board concluded that valuation of these inventories follows a direct costing approach where actual physical flows are matched with direct costs,which is a
method different from LIFO.
BC19.The Board decided to eliminate the LIFO method because of its lack of
representational faithfulness of inventory flows.This decision does not rule out
specific cost methods that reflect inventory flows that are similar to LIFO.
BC20.The Board recognised that,in some jurisdictions,use of the LIFO method for tax purposes is possible only if that method is also used for accounting purposes.It
concluded,however,that tax considerations do not provide an adequate conceptual
basis for selecting an appropriate accounting treatment and that it is not acceptable to
allow an inferior accounting treatment purely because of tax regulations and
advantages in particular jurisdictions.This may be an issue for local taxation
authorities.
BC21.IAS2continues to allow the use of both the FIFO and the weighted average methods for interchangeable inventories.
Cost of inventories recognised as an expense in the period
BC22.The Exposure Draft proposed deleting paragraphs in the previous version of IAS2that required disclosure of the cost of inventories recognised as an expense in the period,
because this disclosure is required in IAS1Presentation of Financial Statements.
BC23.Some respondents observed that IAS1does not specifically require disclosure of the cost of inventories recognised as an expense in the period when presenting an
analysis of expenses using a classification based on their function.They argued that
this information is important to understand the financial statements.Therefore the
Board decided to require this disclosure specifically in IAS2.
Table of Concordance
This table shows how the contents of the superseded SSAP22and the current HKAS2 correspond.Paragraphs are treated as corresponding if they broadly address the same matter even though the guidance may differ.
Superseded SSAP22 paragraph
Current
HKAS2
paragraph
Superseded
SSAP22
paragraph
Current
HKAS2
paragraph
Introduction12027 12,32128 242229 362330 482431 592532 6102633 7112734 81228None 9132935 10143036 11153137 12163236 13173338 14193439 152135None 16223640 172337None 1824None3 1925None5
None7
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