Accounting – FRS 2: Inventories

Accounting - FRS 2 - Inventories

Have you ever realized that there are set standards that govern the inventory accounting activities? The FRS 2 sets all the requirements that every bookkeepers in Singapore should adhere to when reporting inventories. This makes it necessary for you to understand the FRS 2 as it governs financial reporting for all businesses dealing with inventories in Singapore.

According to FRS 2, inventories include finished goods, work in progress (assets in the production process but will be later sold as finished goods), and raw materials. Note that FRS 2 requires that the following things are not included in the inventories.

  • Work in progress in construction contracts
  • Financial instruments – tradable assets including cash, evidence of ownership interest in an entity, and more
  • Any biological asset especially relating to agricultural activities and agricultural output at the point of harvest

Note that all businesses that adhere to FRS 2 are required to observe the said standard when accounting for inventories. With that, it is important to mention that inventory held by producers of forest and agricultural products and mineral products is not covered by the FRS 2. Such inventory is measured at a net realizable value according to the established regulations in the respective industry. Also, inventory held by dealers and brokers as they measure the inventory at fair value and excluding the cost to sell is not covered by the FRS 2. Changes in the fair value and net realizable value can be recognized in the profit or loss statement.

Inventory should be stated at the net realizable value and lower cost. The inventory costs should include:

  • Costs associated with purchases including transport, handling, transport and trade discount received
  • Conversion costs including the variable and fixed manufacturing overheads
  • Additional costs that you incurred while bringing the inventory to its present condition and location

Note that cost of inventory should not include storage costs, abnormal wastage, selling costs, and administrative overheads that are not related to production. Also, interest cost that arises when you acquire inventory on differed payment terms should not be included in the inventory cost.

For interchangeable products, weighted average or FIFO costing are the options available to measure the inventories’ value in accordance to the Singapore Financial Reporting Standard (Also see Accounting Standards in Singapore). With that, you should learn how these methods are applied in the determination of cost of inventory.

Note that all businesses in Singapore and other parts of the world must comply with the FRS 2. If you are not sure of how to account for your inventory, sign up our accounting services and enjoy the privilege of not dealing with these tedious tasks.