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ICDS II Valuation of Inventories

ICDS II shall be applied for valuation of inventories, except:

a)   Work-in-progress arising under construction contract, dealt with by the ICDS III on construction contracts

b)   Work-in-progress which is dealt with by any other ICDS

c)   Shares, debentures and other financial instruments held as stock-in-trade, dealt with by the ICDS VIII on securities

d)   Producers’ inventories of livestock, agriculture and forest products, mineral oils, ores and gases to the extent that they are measured at net realisable value

e)   Machinery spares dealt with by ICDS V on tangible fixed assets.

Measurement of Inventories

I. Inclusions in the cost of inventories:

1. Inventories shall be valued at cost, or net realisable value, whichever is lower.

2. Cost of Inventories shall include all purchase costs, service costs, conversion costs and all other costs which is incurred to bring the inventories to their present location and condition.

i. Purchase cost shall include purchase price inclusive of duties and taxes, freight inwards and other expenses directly related to purchase. Trade discounts, rebates, etc. will not be included

ii. Service cost shall consist of labour and other costs of personnel directly engaged in providing the service.

iii. Conversion cost of inventories shall include costs directly related to the units of production.

3. Interest and other borrowing costs shall not be included in the costs of inventories unless they meet the criteria for recognition of interest as a component of the cost as specified in the ICDS IX on borrowing cost.

II. Exclusions from the cost of inventories:

1. Abnormal amounts of wasted materials, labour, or other production costs

2. Storage costs, unless those costs are necessary in the production process prior to a further production stage

3. Administrative overheads that do not bring the inventories to their present location and condition

4. Selling costs

III. Cost of inventories shall be assigned by using the First-in First-out (FIFO) or weighted average cost formula

IV. The value of opening inventory will be the cost of inventory present at the date of commencement of business, in case of new business and in any other case, cost of inventory as on the last date of immediately preceding year

V. In case of dissolution, whether business is continued or not, the cost of inventories shall be valued at the net realizable value

VI. Disclosure: The accounting policies adopted in measuring inventories along with the total carrying amount of inventories should be disclosed in the financial statements.

Comparison of ICDS II with AS 2

Sl. No. Basis ICDS II AS 2
1. Work in progress ICDS II does not deal with Work-in-progress which is dealt with by any other ICDS. It does not specifically provide for work in progress arising in business of service provider Work in progress arising in the ordinary course of business of service providers is not covered by AS
2. Machine Spares ICDS II does not deal with machinery spares, which are dealt with by ICDS V on tangible fixed assets Stores and spares are one of the classification of inventories. AS 2 does not specifically exclude machine spares
3. Borrowing cost It includes interest and other borrowing cost in inventory cost, if they satisfy the condition of ICDS IX on borrowing cost It does not include interest and other borrowing cost to the cost of inventory
4. Value of opening inventory Provides for the valuation of opening inventory Does not provide for the valuation of opening inventory
5. In case of dissolution Cost of inventory will be valued at net realizable value Does not specifically provide for the valuation of inventory in case of dissolution

For further reading on these series, check out our next article on ICDS III

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