Objective: IAS 2 prescribes the accounting treatment for inventories, including cost determination and expense recognition.
- Applies to all inventories except financial instruments, biological assets, and mineral ores
- Does not apply to work in progress under construction contracts
- Key issues: measurement, cost formulas, and net realizable value
Inventories: Assets held for sale in ordinary course of business, in production for such sale, or materials/supplies to be consumed in production or rendering services.
- Finished Goods: Completed products ready for sale
- Work in Progress: Products in production process
- Raw Materials: Materials and supplies awaiting use in production
Examples: Merchandise, manufactured goods, materials, and supplies.
Inventories should be measured at the lower of cost and net realizable value:
| Component | Description |
|---|---|
| Cost | All costs of purchase, conversion, and other costs to bring inventories to present location/condition |
| Net Realizable Value | Estimated selling price less estimated costs of completion and sale |
Note: Cost includes purchase price, import duties, transportation, handling, and directly attributable costs.
Specific Identification: Used for inventories that are not ordinarily interchangeable or goods produced for specific projects.
FIFO (First-In, First-Out): Assumes that items purchased/produced first are sold first.
Weighted Average Cost: Calculates cost based on weighted average of similar items.
- LIFO (Last-In, First-Out) is not permitted under IAS 2
- Same cost formula should be used for all inventories with similar nature/use
- Formula should be applied consistently from period to period
Beginning inventory: 100 units @ $10 = $1,000
Purchase: 200 units @ $12 = $2,400
Weighted average cost: ($1,000 + $2,400) / 300 units = $11.33 per unit
- Costs of Purchase: Purchase price, import duties, transport, handling, and other directly attributable costs
- Costs of Conversion: Direct labor, systematic allocation of fixed and variable production overheads
- Other Costs: Included only if incurred to bring inventories to present location and condition
- Excluded Costs: Abnormal waste, storage costs (unless necessary), administrative overheads, selling costs
| Event | Accounting Treatment |
|---|---|
| Sale of Inventory | Carrying amount recognized as expense (cost of sales) in period revenue is recognized |
| Write-down to NRV | Recognized as expense in period write-down occurs |
| Reversal of Write-down | Recognized as reduction in inventory expense in period reversal occurs |
- Accounting policies adopted for inventory measurement and cost formulas
- Carrying amounts classified as merchandise, supplies, materials, work in progress, finished goods
- Carrying amount of inventories carried at fair value less costs to sell
- Amount of inventories recognized as expense during period
- Amount of any write-down recognized as expense
- Amount of any reversal of write-down recognized as income
- Circumstances leading to reversal of write-down
- Carrying amount of inventories pledged as security for liabilities