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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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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 overheads. Labour 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 IAS 41 Agriculture, 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 paragraph 23,
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.
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