IAS 2 Inventories contains the requirements on how to account for most types of inventory.
The standard
requires inventories to be measured at the lower of cost and net realisable value (NRV) and outlines
acceptable methods of determining cost, including specific identification (in some cases), first-in first-out
(FIFO) and weighted average cost.
A revised version of IAS 2 was issued in December 2003 and applies to annual periods beginning on or
after 1 January 2005.
Related InterpretationsIFRIC 20 Stripping Costs in the Production Phase of a Surface Mine SIC-1
Consistency - Different Cost Formulas for Inventories. SIC-1 was superseded by and incorporated into IAS
2 (Revised 2003).Summary of IAS 2Objective of IAS 2
The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for
determining the cost of inventories and for subsequently recognising an expense, including any write-
down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs
to inventories.
Scope
Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the
production process for sale in the ordinary course of business (work in process), and materials and
supplies that are consumed in production (raw materials). [IAS 2.6]
However, IAS 2 excludes certain inventories from its scope: [IAS 2.2]
work in process arising under construction contracts (see IAS 11 Construction Contracts) financial
instruments (see IAS 39 Financial Instruments: Recognition and Measurement) biological assets related
to agricultural activity and agricultural produce at the point of harvest (see IAS 41 Agriculture).
Also, while the following are within the scope of the standard, 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 realisable value (above or below cost) in
accordance with well-established practices in those industries. When such inventories are measured at
net realisable value, changes in that value are recognised 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
recognised in profit or loss in the period of the change.Fundamental principle of IAS 2
Inventories are required to be stated at the lower of cost and net realisable value (NRV). [IAS 2.9]
Measurement of inventories
Cost should include all: [IAS 2.10]
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 realisable 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 recognised as an expense in the period in which the write-down occurs. Any reversal should be
recognised 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 recognised, the carrying amount of those inventories is recognised as an expense (often called
cost-of-goods-sold). Any write-down to NRV and any inventory losses are also recognised 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 recognised as an expense in the period amount
