AS - 2 Valuation Of Inventories

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Kunal Shah (Querist)
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20 March 2017 A company have received Rebate from Foreign party which can be utilised only for purchase of Inventory. This company is receiving goods on commercial Invoice from foreign party. The cost of goods purchase is mentioned in the Invoice but for this no money have to be paid only rebate income will be utilised. Whether This should be valued at cost mentioned in the invoice or at Nil as per AS 2 ???

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Kunal Shah

Kunal Shah (Querist)
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18 April 2017 Can anyone answer .

Kunal Shah

Kunal Shah (Querist)
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18 April 2017 Can any one can answer ?

Asha Kanta Sharma

Asha Kanta Sharma

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14 July 2024 Under Accounting Standard (AS) 2 - Valuation of Inventories, inventories should generally be valued at cost or net realizable value, whichever is lower. Let's address your specific scenario regarding the rebate received from a foreign party that can only be used for the purchase of inventory.

### Scenario Description:

1. **Rebate from Foreign Party:**
- The company receives a rebate from a foreign party, which is specifically earmarked for the purchase of inventory.
- This rebate is not in the form of cash but rather as a credit or discount against future inventory purchases.

2. **Purchase of Inventory:**
- The company purchases inventory from the same foreign party using the rebate credit.
- The commercial invoice from the foreign party indicates the cost of the goods purchased, but no actual cash payment is made due to the rebate.

### Valuation under AS 2:

- **Cost of Inventories:**
- According to AS 2, inventories should be valued at cost.
- Cost includes all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.

- **Rebate Utilization:**
- The rebate received from the foreign party, which is specifically for inventory purchases, should be considered as part of the cost of the inventory.
- Even though no cash is paid, the rebate effectively reduces the cost that would otherwise have been paid in cash for the inventory.

### Valuation Method:

- **Invoice Cost vs. Nil Valuation:**
- In your scenario, since the rebate is being utilized for the purchase of inventory, the cost of inventory should be valued at the cost mentioned in the commercial invoice provided by the foreign party.
- This is because the rebate is directly offsetting the cost that would have been payable in cash, effectively reducing the economic cost to the company.

- **Alternative Valuation (Nil Valuation):**
- AS 2 does not require inventories to be valued at nil unless the inventory has no utility or cannot be sold.
- In your case, since the rebate is specifically for inventory purchases and the company receives goods against the commercial invoice, the cost mentioned in the invoice should be recognized as the cost of the inventory.

### Conclusion:

In conclusion, under AS 2, inventories should be valued at the cost incurred to acquire them. In your scenario, where a rebate from a foreign party is used exclusively for inventory purchases and goods are received against a commercial invoice indicating the cost, the inventory should be valued at the cost mentioned in the invoice. The rebate is considered part of the cost of inventory and does not lead to a nil valuation under AS 2. This treatment ensures proper reflection of the economic cost of acquiring the inventory in the company's financial statements.

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