IAS 2
Inventories contain the requirements on how to account for most types of inventories.
The standard requires inventories to be measured at the lower of cost and net realizable
value (NRV) and outlines acceptable methods of determining cost,
including specific identification (in some cases),
first-in first-out (FIFO) and weighted average cost.
Objectives
1. Prescribe the accounting treatment for inventories.
2. It provides guidance for determining the cost of inventories and for subsequently
recognizing an expense,
3. including any write-down to net realizable value.
4. It also provides guidance on the cost formulas that are used to assign costs to
inventories.
Scope
1) Inventories include assets held for sale in the ordinary course of business
(Finished goods),
2) Assets in the production process for sale in the ordinary course of business
(Work in process), and
3) Materials and supplies that are consumed in production (Raw materials).
Excludes certain inventories from its scope: [IAS 2.2]
1) work in process arising under construction contracts
(See IAS-11 Construction Contracts)
2) Financial instruments
(See IAS-39 Financial Instruments: Recognition and Measurement)
3) Biological assets related to agricultural activity and agricultural produce at the point
of harvest (See IAS-41 Agriculture).
IAS 2 does not apply to the measurement of inventories held by: [IAS 2.3]
Producers of agricultural and forest products, agricultural produce after harvest, and
minerals and mineral products,
to the extent that they are measured at net realizable value (above or below cost) in
accordance with well-established practices in those industries.
When such inventories are measured at net realizable value,
changes in that value are recognized in profit or loss in the period of the change
commodity brokers and dealers
who measure their inventories at fair value less costs to sell.
When such inventories are measured at fair value less costs to sell, changes in fair
value less costs to sell are recognized in profit or loss in the period of the change.
Fundamental principle of IAS 2 [IAS 2.9]
Inventories are required to be stated at the lower of cost and net realizable value (NRV).
Measurement of inventories
Cost should include: [IAS 2.10]
All costs of purchase (including taxes, transport, and handling) net of trade discounts
received
costs of conversion (including fixed and variable manufacturing overheads) and
other costs incurred in bringing the inventories to their present location and condition
IAS 23 Borrowing Costs identifies some limited circumstances where borrowing costs
(interest) can be included in cost of inventories that meet the definition of a qualifying asset.
[IAS 2.17 and IAS 23.4]
Inventory cost should not include: [IAS 2.16 and 2.18]
Abnormal waste
Storage costs
Administrative overheads unrelated to production
Selling costs
Foreign exchange differences arising directly on the recent acquisition of inventories
invoiced in a foreign currency
Interest cost when inventories are purchased with deferred settlement terms.
The standard cost and retail methods may be used for the measurement of cost, provided
that the results approximate actual cost. [IAS 2.21-22]
For inventory items that are not interchangeable, specific costs are attributed to the
specific individual items of inventory. [IAS 2.23]
For items that are interchangeable,
IAS 2 allows the FIFO or weighted average cost formulas. [IAS 2.25]
The LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no longer
allowed.
The same cost formula should be used for all inventories with similar characteristics as to
their nature and use to the entity.
For groups of inventories that have different characteristics, different cost formulas may be
justified. [IAS 2.25]
Write-down to net realizable value
NRV is the estimated selling price in the ordinary course of business, less the
estimated cost of completion and the estimated costs necessary to make the sale.
[IAS 2.6]
Any write-down to NRV should be recognized as an expense in the period in which
the write-down occurs.
Any reversal should be recognized in the income statement in the period in which the
reversal occurs. [IAS 2.34]
Expense recognition
IAS 18 Revenue addresses revenue recognition for the sale of goods. When
inventories are sold and revenue is recognized,
The carrying amount of those inventories is recognized as an expense (often called
cost-of-goods-sold).
Any write-down to NRV and any inventory losses are also recognized as an expense
when they occur. [IAS 2.34]
Disclosure
Required disclosures: [IAS 2.36]
Accounting policy for inventories
Carrying amount, generally classified as merchandise, supplies, materials, work in
progress, and finished goods. The classifications depend on what is appropriate for
the entity
Carrying amount of any inventories carried at fair value less costs to sell
Amount of any write-down of inventories recognized as an expense in the period
Amount of any reversal of a write-down to NRV and the circumstances that led to
such reversal
Carrying amount of inventories pledged as security for liabilities
Cost of inventories recognized as expense (cost of goods sold).
