IAS 2

IAS 2 Inventories

Overview: IAS 2 prescribes accounting treatment of inventories, guidance on the determination of cost and subsequent recognition as an expense, guidance on write-down of inventories and cost formulas used to assign costs to inventories.

 

DEFINITION

Inventories are assets:

Held for sale in 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.

 

SCOPE

All inventories except:

Construction contracts (IAS 11 Construction Contracts)

Financial instruments (IAS 32 Financial Instruments: Presentation & 39 Financial Instruments: Recognition and measurement)

Biological assets (IAS 41 Agriculture

 

Does not apply to measurement of inventories held by:

Producers of agricultural and forest products measured at NRV

Minerals and mineral products measured at NRV

Commodity brokers who measure inventory at fair value less costs to sell.

 

INVENTORIES ARE MEASURED AT THE LOWER OF COST AND NET REALISABLE VALUE (NRV)

(This is an implicit impairment test, thus inventories are excluded from the scope of IAS 36 Impairment of Assets)

 

COST Includes:

Costs of purchase, including non-recoverable taxes, transport and handling

Net of trade volume rebates

Costs of conversion

Other costs to bring inventory into its present condition and location.

 

Excludes:

Abnormal waste

Storage costs (unless necessary for the production process)

Admin overheads not related to production

Selling costs

Interest cost (where settlement is deferred)

IAS 23 Borrowing Costs identifies rare circumstances where borrowing costs can be included

 

Cost Formulas:

For non-interchangeable items:

- Specific identification.

 

For interchangeable items, either:

- FIFO

- Weighted average cost.

Use of LIFO is prohibited.

Measurement Techniques:

Standard cost method: Takes into account normal levels of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revised in the light of current conditions.

Retail method:  Often used in the retail industry for measuring inventories of large numbers of rapidly changing items with similar margins for which it is impracticable to use other costing methods. The cost of the inventory is determined by reducing the sales value of the inventory by the appropriate percentage gross margin.

 

NET REALISABLE VALUE: NRV is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs to make the sale.