IAS 2 - Inventories

Inventories are assets 1. Held for sale in the ordinary course of business (finished goods), 2. In the production process for sale in the ordinary course of business (work in process), and 3. In form of materials and supplies that are consumed in production process (raw materials). [IAS 2.6] This Standard applies to all inventories, except: (a) Work in progress arising under construction contracts, (IAS 11); (b) Financial instruments (IAS 32 and IFRS 9); and (c) Biological assets related to agricultural activity (IAS 41). [IAS 2.1] Measurement of Inventories Inventories shall be measured at the lower of cost and NRV. [IAS 2.9] NRV = (estimated selling price in ordinary course of business - estimated costs necessary to make sale) [IAS 2.6] NRV for inventories may not equal fair value less costs to sell. Cost of inventories shall include: [IAS 2.10] costs of purchase (include non adjustable taxes, import duties, transport, handling) (Exclude - trade discounts and rebates) [IAS 2.11] costs of conversion {include Fixed (based on normal capacity) & Variable production overheads) [IAS 2.12] and other costs incurred in bringing the inventories to their present location and condition [IAS 2.15] In some limited circumstances 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 2.16-2.18] abnormal waste storage costs administrative overheads unrelated to production selling costs foreign exchange differences arising directly on recent acquisition of inventories invoiced in foreign currency The standard cost (based on normal production standards) and retail methods (Sale value gross margin) may be used for the measurement of cost, provided that the results approximate actual cost. [IAS 2.21-22] Inventory items that are not interchangeable, specific costs are attributed to 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 enterprise. For groups of inventories that have different characteristics, different cost formulas may be justified. [IAS 2.25] Service provider shall measure the cost of inventories at the costs of their production (consist of labour and other costs of personnel directly engaged in providing the service, including supervisory personnel, and attributable overheads. Expense Recognition 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. The amount of any reversal of any write-down of inventories (Sale value increased and stock in hand), arising from an increase in net realizable value, shall be recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs. [IAS 2.34] Required Disclosures [IAS 2.36] a. Accounting policy for inventories measurement and cost formula. b. Carrying amount of inventories for each classification; Raw materials, work in progress, and finished goods. c. Carrying amount of inventories carried at fair value less cost to sell (agricultural product at point of harvest IAS 41 ) d. Amount of any write-down of inventories recognized as an expense in the period. e. The circumstances or events that led to the reversal of a write-down of inventories f. Carrying amount of inventories pledged as security for liabilities. g. Amount of inventories recognized as expense during the period.