IAS 2 - Inventories

Objective
IAS 2 prescribes the accounting treatment for inventories. A primary issue in accounting for inventories is the amount of cost to be recognised as an asset and carried forward
until the related revenues are recognised

Scope Inventories are assets:

IAS 2 applies to all inventories, except Held for sale in the ordinary course of business
Financial instruments (see IAS 32 Financial Instruments: Presentation and IFRS 9 In the process of production for such sale; or
Financial Instruments); and In the form of materials or supplies to be consumed in the
Biological assets related to agricultural activity and agricultural produce at the point production process or in the rendering of services
of harvest (see IAS 41 Agriculture) Recognised as current assets in the Statement of Financial Position

The costs attributed to inventories comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition

COSTS OF
INVENTORY

COSTS OF COSTS OF OTHER COSTS

PURCHASE CONVERSION

Purchase price Direct costs such as direct labour and materials Other costs are to be included in inventories only
Import duties Indirect Fixed and variable production to the extent that they are incurred to bring them
Other non recoverable taxes overheads to their present location and condition
Transport costs Fixed production overheads are : Costs to be excluded from the cost of inventories
Handling costs -> Depreciation and maintenance of buildings, and recognised as expenses in the period in
Other costs directly attributable to the equipment and right-of-use assets used in the which they are incurred are:
acquisition of finished goods, production process 1. Abnormal amounts of wasted materials, labour or
-> Factory management expense other production costs;
materials and services
The allocation of fixed production overheads is 2. Storage costs, unless those costs are necessary in the
Trade discounts, rebates and other
based on the normal capacity of the facilities production process before a further production stage;
similar items are deducted in
Variable production overheads are indirect 3. Administrative overheads that do not contribute to
determining the costs of purchase
costs of production that vary directly with the bringing inventories to their present location and
volume of production such : condition; and
4. Selling costs
-> Indirect material
-> Indirect labour

Valuation
The standard’s basic rule is that inventories are measured at the lower of COST and NRV Net Realisable Value
Net Realisable Value = The estimated selling price in the ordinary course of business - The estimated costs of completion - the estimated costs necessary to make the sale

Measurement of Cost
Acceptable methods of determining the cost of inventory include
FIFO (First-In-First-Out)
Weighted Average Cost
Disclosure requirements
Periodic Average Cost The financial statements shall disclose:
the accounting policies adopted in measuring inventories, including the cost
LIFO (Last-In-First-Out) is NOT permitted in IFRS formula used
the total carrying amount of inventories and the carrying amount in
classifications appropriate to the entity
Other accepted methods of measurement the carrying amount of inventories carried at fair value less costs to sell
Standard costs : Standard costs should take into account normal levels of materials and supplies, the amount of inventories recognised as an expense during the period
the amount of any write-down of inventories recognised as an expense in the
labour, efficiency and capacity utilisation. They must be regularly reviewed and revised where
period
necessary the amount of any reversal of any write-down that is recognised as a
Retail method : The retail method is often used in the retail industry for measuring inventories with reduction in the amount of inventories recognised as expense in the period
high volumes of rapidly changing items with similar margins for which it is impracticable to use other the circumstances or events that led to the reversal of a write-down of
inventories
measurement techniques. In these circumstances, the cost of inventory is determined by converting
the carrying amount of inventories pledged as security for liabilities
selling prices to cost by adjusting for a normal margin

Follow to not miss out more free content. Charaf Bourhalla + Follow