(a) (i) Fixed production overhead costs: Under IAS 2, fixed production overheads are costs that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings or salaries of production supervisors. These costs must be allocated to inventories on the basis of the normal capacity of the production facilities. Normal capacity is the production expected to be achieved on average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. If actual production is lower than normal capacity due to abnormally low activity, unallocated fixed overheads are recognized as an expense in the period incurred rather than increasing the cost per unit of inventory. This prevents inventories from being overstated. For example, in a Ghanaian manufacturing bank-financed entity, if a factory operates at 70% capacity due to power outages (a common issue in Ghana pre-2025), the fixed overheads would be allocated based on normal 85% capacity, with the excess expensed to comply with BoG’s emphasis on accurate asset valuation for credit risk assessment.

(ii) The valuation of closing inventories: IAS 2 requires inventories to be measured at the lower of cost and net realizable value (NRV). Cost includes all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. NRV is the estimated selling price in the ordinary course of business less the estimated costs of completion and costs necessary to make the sale. If NRV is lower than cost, inventories are written down to NRV, with the write-down recognized as an expense. This is assessed on an item-by-item basis, or by groups of similar items if individual assessment is impracticable. In practice, for Ghanaian banks like GCB Bank evaluating borrower financials, this ensures conservative valuation, aligning with Basel III principles adapted by BoG for impairment provisioning, preventing overstatement of assets that could mislead lenders during the post-2019 banking cleanup era.

(iii) The method to use in the identification of costs when there are large numbers of items which are ordinarily interchangeable: For inventories that are ordinarily interchangeable (e.g., commodities like oil or grains), IAS 2 permits the use of the First-In, First-Out (FIFO) or Weighted Average Cost methods for cost identification. The Specific Identification method is not appropriate for such items as it is only suitable for distinct, non-interchangeable items. FIFO assumes that the earliest purchased items are sold first, while Weighted Average uses a periodic or continuous average cost. The chosen method must be applied consistently. Last-In, First-Out (LIFO) is not allowed under IAS 2. In Ghanaian context, for banks dealing with commodity traders (e.g., cocoa exporters financed by Ecobank Ghana), FIFO is often preferred for its alignment with physical flow and BoG’s risk management guidelines, aiding in accurate profitability analysis amid volatile cedi exchange rates.

(b) Four disclosure requirements of IAS 2 in respect of closing inventories:

• The accounting policies adopted in measuring inventories, including the cost formula used (e.g., FIFO or weighted average).
• The total carrying amount of inventories and the carrying amount in classifications appropriate to the entity (e.g., raw materials, work-in-progress, finished goods).
• The amount of inventories recognized as an expense during the period (cost of sales).
• The amount of any write-down of inventories to net realizable value and the amount of any reversal of such write-downs.

These disclosures enhance transparency, crucial for Ghanaian regulators like BoG under the Corporate Governance Directive 2018, ensuring stakeholders can assess inventory risks, especially in sectors prone to obsolescence like electronics retailing.