IAS 2 Inventories

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 writedown 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]
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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]
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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.

IFRIC 20 - Stripping Costs in the Production Phase of a Surface Mine

Summary of IFRIC 20
Background
In surface mining operations, entities may find it necessary to remove mine waste materials ('overburden')
to gain access to mineral ore deposits. This waste removal activity is known as 'stripping'. There can be
two benefits accruing to the entity from the stripping activity: usable ore that can be used to produce
inventory and improved access to further quantities of material that will be mined in future periods.
IFRIC 20 considers when and how to account separately for these two benefits arising from the stripping
activity, as well as how to measure these benefits both initially and subsequently.

IFRIC 20 only deals with waste removal costs that are incurred in surface mining activity during the
production phase of the mine ('production stripping costs').
Overview of requirements
IFRIC 20 requires:
The costs of stripping activity to be accounted for in accordance with the principles of IAS

2Inventories to the extent that the benefit from the stripping activity is realised in the form of inventory
produced
The costs of stripping activity which provides a benefit in the form of improved access to ore is

recognised as a non-current 'stripping activity asset' where the following criteria are met:
it is probable that the future economic benefit (improved access to the ore body)

associated with the stripping activity will flow to the entity

the entity can identify the component of the ore body for which access has been

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improved

the costs relating to the stripping activity associated with that component can be

measured reliably
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When the costs of the stripping activity asset and the inventory produced are not separately
identifiable, production stripping costs are allocated between the inventory produced and the
stripping activity asset by using an allocation basis that is based on a relevant production measure

A stripping activity asset is accounted for as an addition to, or as an enhancement of, an

existing asset and classified as tangible or intangible according to the nature of the existing asset of
which it forms part

A stripping activity asset is initially measured at cost and subsequently carried at cost or its
revalued amount less depreciation or amortisation and impairment losses

A stripping activity asset is depreciated or amortised on a systematic basis, over the expected
useful life of the identified component of the ore body that becomes more accessible as a result of
the stripping activity. The units of production method is used unless another method is more
appropriate.
Application and transition
IFRIC 20 applies to annual periods beginning on or after 1 January 2013. Earlier application is permitted.

The Interpretation applies to production stripping costs incurred on or after the beginning of the earliest
period presented. Any 'predecessor stripping asset' at that date is required to be reclassified as a part of
the existing asset to which the stripping activity is related (to the extent there remains an identifiable
component of the ore body to which it can be associated), or otherwise recognised in opening retained
earnings at the beginning of the earliest period presented.