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Ind AS 2 Real Life Example

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Ind AS 2 Real Life Example

Company

Uploaded by

sarthakchikhaliya10
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Ind AS 2 - Real-Life Example for an Indian Company

Real-Life Example of Ind AS 2 - Inventories for an Indian Company

Scenario: TATA Steel - Inventory Management in the Steel Industry

TATA Steel, a leading Indian steel manufacturing company, produces and sells

various steel products like TMT bars, coils, and sheets.

Let's see how Ind AS 2 - Inventories applies to TATA Steel in a real-life context:

1. Valuation of Steel Inventory:

TATA Steel manufactures 1,000 tons of steel sheets. The cost of production for

each ton is Rs.50,000, but due to a drop in global steel prices,

the selling price falls to Rs.48,000 per ton.

- As per Ind AS 2, inventory is valued at the lower of cost (Rs.50,000) or net

realizable value (Rs.48,000).

- TATA Steel will report the value of its inventory as Rs.48 crore (Rs.48,000 x

1,000 tons) instead of Rs.50 crore.

This ensures that the inventory value is not overstated in financial statements.

2. Inclusion of Cost Components:

The cost of producing steel includes raw materials (iron ore, coal), labor, and

factory overheads.

- If TATA Steel incurs transportation costs for delivering raw materials to its

plant, Ind AS 2 allows these costs to be added to the inventory cost.

- For example, if transportation costs Rs.500 per ton of raw material, it is


included in the inventory valuation.

3. Exclusion of Abnormal Costs:

Suppose a furnace breakdown delays production, leading to abnormal idle

costs of Rs.10 lakh.

- According to Ind AS 2, these costs are not included in the inventory valuation

but are charged to the profit and loss account.

4. FIFO Method for Raw Materials:

TATA Steel purchases iron ore over time at varying prices:

- January: 500 tons at Rs.5,000 per ton.

- February: 500 tons at Rs.5,200 per ton.

If the company uses FIFO (First In, First Out) for inventory valuation, the cost of

the first 500 tons of iron ore used in production will be Rs.5,000 per ton.

The remaining 500 tons will be valued at Rs.5,200 per ton.

5. Write-Down of Inventory:

During a downturn in the steel industry, the demand for steel drops, and unsold

inventory accumulates.

- If TATA Steel's inventory of coils is valued at Rs.60 crore but can now be sold

only for Rs.50 crore due to reduced demand, Ind AS 2 requires the inventory to

be written down to Rs.50 crore, with a Rs.10 crore loss recorded in the profit

and loss account.

6. Disclosure Requirements:

TATA Steel must disclose in its financial statements:

- The accounting policies for inventory valuation.


- The total carrying value of inventories.

- The write-down amount (if any).

- The method used for inventory costing (FIFO or weighted average).

Conclusion:

By applying Ind AS 2, TATA Steel ensures its inventory is valued accurately,

reflecting the economic reality.

This helps investors and stakeholders make informed decisions, ensuring

transparency and compliance with accounting standards.

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