Difference Between AS 2 and Ind AS 2

AS 2: Valuation of Inventory (Revised): The accounting treatment for inventories is prescribed in AS 2 (Revised) ‘Valuation of Inventories’, which provides guidance for determining the value at which inventories, are carried in the fnancial statements until related revenues are recognised. It also provides guidance on the cost formulas that are used to assign costs to inventories and any write-down thereof to net realisable value.

Measurement of Inventories

Inventories should be valued at lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The valuation of inventory at lower of cost and net realisable value is based on the view that no asset should be carried at a value which is in excess of the value realisable by its sale or use.

Ind AS 2: Valuation of Inventory

Inventories constitute a major portion of current assets of an entity. A primary issue in accounting for inventories is the amount of cost to be recognised as an asset and carried forward until the related revenues are recognised.

Ind AS 2 prescribes the accounting treatment for inventories, such as, determination of cost and its subsequent recognition as expense, including any write-downs of inventories to net realisable value and reversal of writedowns.

Difference Between AS 2 and IndAS 2

AS 2 excludes the WIP of service providers from its scope.

IND AS 2 deals with the service WIP also. As per IND AS 2, the service WIP primarily consists of:

  • direct labour and
  • attributable overheads but excludes
  • sales overheads,
  • general admin. Overheads and
  • other non attributable overheads.
Less disclosure required as compared to IND AS 2 IND AS 2 requires more disclosures as compared to existing AS 2.
AS 2 specifies that “Inventories does not include machinery spares, which can be used only in connection with an item of fixed asset and the use of such machinery spares is expected to be irregular”, as these are to be accounted for, as per AS 10 on Property, Plant and Equipment. IND AS 2 does not contain such specific explanation, as this aspect is covered by IND AS 16.
There is no such provision in existing AS 2. IND AS 2 clarifies that when inventories are purchased in the scheme of deferred settlement, the difference between amount paid and “normal credit terms” price is to be recognised as interest expense over the period of financing.
This aspect is not covered by the existing AS 2. Ind AS 2 does not apply to measurement of inventories held by commodity broker-traders, who measure their inventories at fair value less costs to sell. It also defines the term “fair value” and also explains the difference between fair value and net realisable value.
The existing AS 2 specifically provides that the formula used in determining the cost of an item of inventory should reflect the fairest possible estimate of the actual cost incurred in bringing the items of inventory to their present location and condition. Ind AS 2 does not specifically state so but it requires the use of consistent cost formulas for all items of inventory having a similar nature and use.

AS 2 excludes from its scope producer’s inventory of:

  • livestock,
  • agricuture and forest products,
  • minerals and mineral products

to the extent they are measured at NRV in accordance with well established practices in those industries.

IND AS 2 excludes only the measurement of inventories held by such producers, although it provides guidance on measurement ofsuch inventories.