IAS 2 Inventories

It provides guidance on the valuation and classification of inventories.

Inventories include assets:

• held for sale in the ordinary course of business,
• In the process of production for such sale,
• In the form of materials or supplies to be consumed in the production process or in the rendering of services.

IAS 2 excludes following inventories

• financial instruments (IAS 32 and IFRS 9); and
• Biological assets arising from agricultural activity (IAS 41).

This Standard supersedes SIC‑1 Consistency—Different Cost Formulas for Inventories.

Measurement of inventories

Under IAS 2 inventory should be valued at the lower of Cost & Net Realizable value (NRV).

Cost should include all costs of purchase net of discounts and other costs incurred in bringing the inventories to their present location and condition.

NRV = estimated selling price less estimated cost to sell.

Cost Formulas

Paragraph 25 states that Cost of inventories should be measured using either the:

• FIFO method (First-in, First-out method)
• Weighted-average cost (WAC) method

FIFO method assumes the inventories that are purchased first are sold first. This implies that the ending or remaining inventory is valued at the most recent prices. The WAC method determines the weighted-average cost of similar items at the start of a period and the cost of goods or services purchased or produced during the period.

An entity should value the inventories by using same formula if the items are or similar nature and use. Different cost methods can be used if the inventories are not similar in nature and use.

Cost Excluded from Inventory

Examples of costs excluded from the cost of inventories and recognised as expenses in the period in which they are incurred are:

• abnormal amounts of wasted materials, labour or other production costs;
• storage costs, unless those costs are necessary in the production process before a further production stage;
• administrative overheads that do not contribute to bringing inventories to their present location and condition; and
• selling costs.

Expense recognition

IAS 18 Revenue addresses revenue recognition from the sale of goods. When inventories are sold and revenue is recognized, the carrying amount of those inventories is recognized as an expense known as cost-of-goods-sold. Any write-down to NRV and any inventory losses are also recognized as an expense when they occur.

Disclosures

• the accounting policy for inventories.
• The carrying amount, materials, work in progress, and finished goods.
• 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.
• Cost of inventories recognized as expense as cost of goods sold.
• the carrying amount of inventories pledged as security for liabilities.

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Humayun Atif | CMA, CPA, CA (FIN), MS-IT, CA Articles from Big 4, Certified Forensic Accountant (USA), Six Sigma & Oracle Certified.

Atif is passionate about Business, Tech, and the written word. He is also a published author of the book ‘IFRS Made Easy’. Atif has worked with some of the world’s largest brands in Canada and Dubai. He is a tax and IFRS coach and the founder of accountingblogger.com