Financial Reporting Standards 2: Inventories

Financial Reporting Standards 2 Inventories

Do you know that there are set standards that regulate inventory accounting activities? When reporting stocks, every business must abide by the requirements set by the Financial Reporting Standards 2. Hence, you need to comprehend the FRS 2 as it governs the financial reporting for all businesses in Malaysia (Also see Is your business accounting up-to-date?).

Work-in-progress (assets in the production process but would be later sold as finished products) and raw materials that shall be recorded in the Balance Sheet (Also see Difference Between Balance Sheet & Consolidate Balance Sheet).

The following items should not be included in the stocks.

  • Financial instruments – tradable assets consist of cash, proof of ownership interest in a company, and more.
  • Construction contracts that are still in progress.
  • Any biological asset particularly farming activities and agricultural output at the point of harvest

When managing accounting for stocks, keep in mind that all companies that follow FRS 2 are required to pay attention to the IAS 2. Hence, it is necessary to point out that stock held by manufacturers of agricultural and forest products and mineral products is not under the regulation of the FRS 2. The stock is measured using a possible net worth according to the policies in the particular industry. Also, stock held by the dealers and brokers too as they measure the stock at fair value and omitting the cost to sell is not covered by the FRS 2. Modifications in the net realisable value and fair value can be acknowledged in the Profit or Loss (Also see Why your business needs a bookkeeping service now than ever).

The inventory ought to be stated at the net realisable value and lower cost. Inventory costs include:

  • Conversion expenses consisting of the set and variable production overheads
  • Expenses associated with purchases comprised of transportation, handling, transport and trade discount obtained
  • Extra expenses that you incurred while bringing the stock to its present condition and place

Keep in mind that the expense of stock should not consist of storage expenses, selling costs, irregular waste, and administrative overheads that are not related to production. Likewise, interest expense that rises when you receive stock on varied payment terms should not be consisted of in the stock expense (Also see FRS 10 Events after the Reporting Period).

All business worldwide should abide by the FRS 2. Reach out to any accounting service in Johor Bahru if you are still unsure about how to account for your stock.

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