I will also look at possible changes and solutions to the problems that businesses around the world are facing. What is the International Accounting Standards 'AS? In 1973, the accountancy bodies of the United States of America, Canada, Germany, United Kingdom, France, Japan, Australia, the Netherlands, Ireland, and Mexico made an agreement to establish an independent organization known as The International Accounting Standard Committee (IAC). Since that time, accounting rules and standards are issued by this committee in order to organize accounting practices in these countries (Dolomite, 2010).
In 1997, the IAC realized that to maintain efficient performance, national accounting systems should strive to attain high-quality international accounting standards. The IAC formed a team to review its structure and scheme. Once the review was complete, this team submitted their report to the IAC board. The final report and proposal was delivered to the IAC board in November 1998 for approval and was subsequently published by the board. In 2000, the new reform of the International Accounting Standard Board (SAAB) worked under the International Accounting Standard Committee Foundation (CIVICS).
I History of AS 2 September 1974 Exposure Draft EH Valuation and Presentation of Inventories in the Context of the Historical Cost System October 1975 AS 2, Valuation and Presentation of Inventories in the Context of the Historical Cost System August 1991 Exposure Draft EYE Inventories December 1993 AS 2 (1993) Inventories (revised as part of the 'Comparability of Financial Statements' project) 1 January 1995 Effective date of AS 2 (1993) 18 December 2003 Revised version of AS 2 issued by the SAAB 1 January 2005 Effective date of AS 2 (Revised 2003) Objective of AS 2
To prescribe the accounting treatment for inventories. A primary issue in accounting for inventories is the amount of cost to be recognized as an asset and carried forward until the related revenues are recognized. This Standard provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. Scope Inventories include assets held for sale in the ordinary course of business (finished goods), in the production recess for sale in the ordinary course of business (work in process), and materials and supplies that are consumed in production (raw materials). [AS 2. 6]3 However, AS 2 excludes certain inventories from its scope: [AS 2. 2] work in process arising under construction contracts (see AS 11 Construction Contracts)4 financial instruments (see AS 39 Financial Instruments: Recognition and Measurement) biological assets related to agricultural activity and agricultural produce at the point of harvest (see AS 41 Agriculture). Also, while the following are within the scope of he standard, 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, to the extent that they are measured at net realizable value (above or below cost) in accordance with well-established practices in those industries. When such inventories are measured at net realizable value, changes in that value are recognized in profit or loss in the period of the change. Modify brokers and dealers 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 recognized in profit or loss in the period of the change. 6 Key terms The following terms are used in this Standard with the meanings specified: Inventories are assets: held for sale in the ordinary course of business; in the process of production for such sale; or in the form of materials or supplies to be consumed in the production process or in the rendering of services.
Net realizable value Estimated selling price in the ordinary course of business less the estimated costs: of completion and accessory 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. Fundamental principle of AS 2 Inventories are required to be stated at the lower of cost and net realizable value (NOR). [AS 2. 9]8 Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion necessary to make the sale. Measurement of inventories Cost should include all: [AS 2. 10] costs of purchase (including taxes, transport, and handling) net of trade discounts achieved costs of conversion (including fixed and variable manufacturing overheads) and other costs incurred in bringing the inventories to their present location and condition Inventory is one of the items that is listed in the balance sheet of a company. In some companies, this item is one of the most important items that the company relies on in its operations. As a result, it should be measured and recorded accurately in order to show the exact value of cost of goods sold.
This value will determine the net income for the firm According to ASSAI, inventories are measured at he lower of cost and net realizable value. To make this inventory ready for trade, this cost must include all of the expenses (direct and indirect), as well as the costs that incur as a result of the decommissioning and restoration of production of inventories (AS 2, 'ASP 2010). 11 Examining the advantages and disadvantages of inventories In AS 2 we see that there are advantages in various aspects of applying this standard.
These vary from costing methods to methods of how inventory is valued. We will now evaluate some of these advantages. With all advantages there are disadvantaged. We will evaluate them together. The methods used in determining the cost of inventories under FIRS are: First-in, first-out (FIFO) and the Weighted average method; Use of the last-in, first-out (LIFO) method is not allowed any more (Dolomite 2004; Mira et al 2008). US GAP uses the same methods in addition to the LIFO method, which is not permitted by AS 2. Nevertheless, U. S.
GAP requires firms using the LIFO method to report their inventory using FIFO. As a result, it is possible to adjust the U. S. Financial reports for comparison between firms that use LIFO with those that use FIFO only. Taking the above mentioned requirements into consideration, the value of inventories for the year ending October 31, 2009 of John Deer's Group using the FIFO method is $ 3,764 million, whereas the value for the same inventories when adjusted to use LIFO method is $2,397 million Cohn Deere group annual report 2009 p,50). 2 The other methods that are used for costing are: Absorption costing Marginal costing The background of each method and costing AS 2 Critique on implementation What is Fair Value? The SAAB, accompanied and some standard-setters and regulators in many countries including the ELI, is moving steadily towards a greater emphasis on the use of fair values in financial reporting. The concept of fair value has emerged gradually in IAC standards over a couple of decades, not always consistently and certainly without rigorous analytical foundation.
The theoretically logical meaning of fair value as used in AS GAP is current economic value to the existing owner. Alternative practicable measures are proxies for current economic value but the implications of using alternative proxies need to be explored by SAAB as a matter of urgency. Fair value is f itself not a practicable measure. Adherence to fair values as a theoretical concept does not obviate, and indeed requires for practical purposes, comparative appraisal of the array of available alternative concepts of income measurement and asset valuation.
Paragraph 6 of AS 2 gives the following definition of fair value for inventories: "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 works the fair value accounting method? Fair value isn't laid in one conception. The basis of fair value is that the value of an asset or liability is the value for what the asset can be traded between well informed, independent parties which want to do the transaction.
The best indication of fair value is the quoted price on an active market. But not every asset has a quoted price on an active market. If an active market isn't available, than you can look to the last transaction. This is Just a good indication if the economic situation has been the same. At least you can use valuation techniques to determine the valuation. Other fair value conceptions are value in use and replacement value.