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Commission Regulation (EC) No
2238/2004 of 29 December 2004 amending Regulation (EC) No 1725/2003
adopting certain international accounting standards in accordance
with Regulation (EC) No 1606/2002 of the European Parliament and of
the Council, as regards IASs IFRS 1, IASs Nos 1 to 10, 12 to 17, 19
to 24, 27 to 38, 40 and 41 and SIC Nos 1 to 7, 11 to 14, 18 to 27
and 30 to 33
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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 totheir 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
subsequentlyrecoverable 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
byproduct. 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. IAS 23 Borrowing
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.
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