Ias 2 Inventories

IAS 2 INVENTORIES
HISTORY OF IAS 2
September
1974
Exposure Draft E2 Valuation and Presentation of
Inventories in the Context of the Historical Cost
System
October
1975
IAS 2, Valuation and Presentation of Inventories in
the Context of the Historical Cost System
August
1991
Exposure Draft E38 Inventories
December
1993
IAS 2 (1993) Inventories (revised as part of the
'Comparability of Financial Statements' project)
1 January
1995
Effective date of IAS 2 (1993)
18
December
2003
Revised version of IAS 2 issued by the IASB
1 January
2005
Effective date of IAS 2 (Revised 2003)
RELATED INTERPRETATIONS
SIC 1 Consistency Different Cost Formulas for
Inventories
SIC 1 was superseded by and incorporated into IAS 2
(Revised 2003)
Issues Relating to This Standard that IFRIC Did Not Add
to Its Agenda
SUMMARY OF IAS 2
Objective 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 of any reversal of a writedown to NRV and the
circumstances that led to such reversal
carrying amount of inventories pledged as security for
liabilities
cost of inventories recognised as expense (cost of goods
sold). IAS 2 acknowledges that some enterprises classify
income statement expenses by nature (materials, labour,
and so on) rather than by function (cost of goods sold,
selling expense, and so on). Accordingly, as an
alternative to disclosing cost of goods sold expense, IAS
2 allows an entity to disclose operating costs recognised
during the period by nature of the cost (raw materials
and consumables, labour costs, other operating costs)
and the amount of the net change in inventories for the
period). [IAS 2.39] This is consistent with IAS 1
Presentation of Financial Statements, which allows
presentation of expenses by function or nature.

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