Income Computation and Disclosure Standard for valuation of inventories
ICDS (Income Computation and Disclosure Standard) is related to computation of income which chargeable under the head “Profits and gains of Business or profession” and “Income from other sources” and is not meant for maintenance books of accounts.
Meaning of Inventory as per the ICDS
Inventories are assets:
- which are held in the business for sale in the normal course of business
- are used in the production process for such sale
- are in the form of supplies or materials which are used in the process of production or for rendering services
Techniques for measuring cost
Methods for the measuring the cost of inventories involves methods like the retail method or the standard cost method. Standard costs take into consideration standard consumption level of materials and labor, supplies, capacity utilization and efficiency. They are reviewed regularly and, if required, revising for accommodating the current conditions.
The retail technique could be utilized in retail trading to measure inventories of huge number of quickly changing products which have same margins and for it becomes impracticable for using different methods of costing. The cost inventory cost is determined by decreasing sales value of the inventory an appropriate gross margin percentage. The percentage to be used needs to consider inventory that has been reduced below to its original selling price.
Measurement of Inventories
Inventories should be valued at cost, or NRV (net realizable value), whichever is lower.
Net Realizable Value
Inventories should be written down to the NRV or net realizable value on product-by-product basis. Where ‘products in inventory’ concerning to the similar products having comparable end uses or purposes and are marketed and produced in the similar geographic area and could not be feasibly assessed individually from other products in such product lines, such inventories should be clustered altogether and the same should be written down to their NRV or net realizable value using an aggregate basis.
The following facets should be disclosed-
- The accounting policies which are implemented in measuring the inventories, including the costing methodology or formulae used. Cases where the standard costing methodology has been applied as for measuring cost, particulars of the inventories and an authorization of the fact that standard cost are almost similar to actual cost; and
- The total amount of carrying inventories and its grouping appropriate to a person.