IAS 2 Net Realizable Value Deductions for Factory Scrap Inventory
IAS 2 requires deducting factory scrap net realizable value from primary product cost, reducing inventory carrying basis and protecting gross margins.
Briquetting Deduction
Meaning
Commercial pricing adjustments in metal scrap and mineral processing account for the loss of material density and processing costs associated with converting loose fines into compressed blocks. In commodity purchasing agreements, a briquetting deduction reduces the payable unit price to reflect the additional energy and binder required to process un-compacted swarf or powder. The adjustment applies whenever raw feed material falls below the density threshold specified in the melt shop intake contract.
It ceases to apply once the material is delivered in fully compacted, verified high-density briquettes meeting furnace charging specifications.
Valuation Adjustment
Contract terms establish a monetary offset based on measured fines content and moisture percentage during intake sampling. When raw turnings contain residual cutting fluids, a briquetting deduction compensates the buyer for the thermal inefficiency and baghouse loading caused by volatilising liquids during smelting. Surcharges scale directly with the measured volume of un-agglomerated material.
Yield Difference
Furnace recovery rates drop when loose scrap floats on slag or oxidises before melting into the liquid pool. Processing un-compacted fines creates airborne dust losses during conveyor transport and top-charging, which lowers metallic recovery relative to solid scrap inputs. Converting loose swarf into dense briquettes raises furnace yield from seventy percent to ninety-two percent, yet the pressing equipment incurs mechanical wear, hydraulic energy expense and binder consumption.
Pricing models account for this conversion work by penalising un-pressed deliveries. Pilot briquetting tests quantify the density achieved under specific ram pressures, distinguishing a vendor’s laboratory sample from bulk press throughput. Calling a briquetting process production-ready based on a dry bench test leads to yield failure when oily production swarf clogs the compaction dies.
Contractual Boundary
Intake clauses enforce these price reductions only at the point of custody transfer before charging into the furnace. Deductions do not extend to internal re-melting of shop scrap generated within the foundry itself.