IAS 2 Inventories

Overview
IAS 2 Inventories contains the requirements on how to account for most types of inventory. The standard requires inventories to be measured at the lower of cost and net realisable value (NR ! and outlines acceptable methods of determinin" cost# includin" specific identification (in some cases!# first$in first$out (%I%&! and wei"hted avera"e cost. A revised version of IAS 2 was issued in 'ecember 2(() and applies to annual periods be"innin" on or after * +anuary 2((,. -istory of IAS 2 September *./0 12posure 'raft 12 Valuation and Presentation of Inventories in the Context of the Historical Cost System &ctober *./, IAS 2# aluation and 3resentation of Inventories in the 4onte2t of the -istorical 4ost System Au"ust *..* 12posure 'raft 1)5 Inventories 'ecember *..) IAS 2 (*..)! Inventories (revised as part of the 64omparability of %inancial Statements6 pro7ect! * +anuary *.., 1ffective date of IAS 2 (*..)! *5 'ecember 2(() Revised version of IAS 2 issued by the IAS8 * +anuary 2((, 1ffective date of IAS 2 (Revised 2(()!

Summary of IAS 2
Objective of IAS 2 The ob7ective of IAS 2 is to prescribe the accountin" treatment for inventories. It provides "uidance for determinin" the cost of inventories and for subsequently reco"nisin" an e2pense# includin" any write$down to net realisable value. It also provides "uidance on the cost formulas that are used to assi"n costs to inventories.

Scope
Inventories include assets held for sale in the ordinary course of business (finished "oods!# assets in the production process for sale in the ordinary course of business (wor9 in process!# and materials and supplies that are consumed in production (raw materials!. :IAS 2.;<

-owever# IAS 2 e2cludes certain inventories from its scope= :IAS 2.2<

wor9 in process arisin" under construction contracts (see IAS ** Construction Contracts! financial instruments (see IAS ). Financial Instruments: Recognition and Measurement! biolo"ical assets related to a"ricultural activity and a"ricultural produce at the point of harvest (see IAS 0* Agriculture!.

Also# while the followin" are within the scope of the standard# IAS 2 does not apply to the measurement of inventories held by= :IAS 2.)<

producers of a"ricultural and forest products# a"ricultural produce after harvest# and minerals and mineral products# to the e2tent that they are measured at net realisable value (above or below cost! in accordance with well$established practices in those industries. >hen such inventories are measured at net realisable value# chan"es in that value are reco"nised in profit or loss in the period of the chan"e. commodity bro9ers and dealers who measure their inventories at fair value less costs to sell. >hen such inventories are measured at fair value less costs to sell# chan"es in fair value less costs to sell are reco"nised in profit or loss in the period of the chan"e.

Fundamental principle of IAS 2

Inventories are required to be stated at the lower of cost and net realisable value (NR !. :IAS 2..<

Measurement of inventories
4ost should include all= :IAS 2.*(<

costs of purchase (includin" ta2es# transport# and handlin"! net of trade discounts received costs of conversion (includin" fi2ed and variable manufacturin" overheads! and other costs incurred in brin"in" the inventories to their present location and condition

IAS 2) orro!ing Costs identifies some limited circumstances where borrowin" costs (interest! can be included in cost of inventories that meet the definition of a qualifyin" asset. :IAS 2.*/ and IAS 2).0< Inventory cost should not include= :IAS 2.*; and 2.*5<

abnormal waste

stora"e costs administrative overheads unrelated to production sellin" costs forei"n e2chan"e differences arisin" directly on the recent acquisition of inventories invoiced in a forei"n 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 appro2imate actual cost. :IAS 2.2*$22< %or inventory items that are not interchan"eable# specific costs are attributed to the specific individual items of inventory. :IAS 2.2)< %or items that are interchan"eable# IAS 2 allows the %I%& or wei"hted avera"e cost formulas. :IAS 2.2,< The ?I%& formula# which had been allowed prior to the 2(() revision of IAS 2# is no lon"er allowed. The same cost formula should be used for all inventories with similar characteristics as to their nature and use to the entity. %or "roups of inventories that have different characteristics# different cost formulas may be 7ustified. :IAS 2.2,<

Write-down to net realisable value

NR is the estimated sellin" price in the ordinary course of business# less the estimated cost of completion and the estimated costs necessary to ma9e the sale. :IAS 2.;< Any write$down to NR should be reco"nised as an e2pense in the period in which the write$down occurs. Any reversal should be reco"nised in the income statement in the period in which the reversal occurs. :IAS 2.)0<

E pense reco!nition
IAS *5 Revenue addresses revenue reco"nition for the sale of "oods. >hen inventories are sold and revenue is reco"nised# the carryin" amount of those inventories is reco"nised as an e2pense (often called cost$of$"oods$sold!. Any write$down to NR and any inventory losses are also reco"nised as an e2pense when they occur. :IAS 2.)0<

"isclosure
Required disclosures= :IAS 2.);<

accountin" policy for inventories carryin" amount# "enerally classified as merchandise# supplies# materials# wor9 in pro"ress# and finished "oods. The classifications depend on what is appropriate for the entity carryin" amount of any inventories carried at fair value less costs to sell amount of any write$down of inventories reco"nised as an e2pense in the period amount of any reversal of a write$down to NR reversal and the circumstances that led to such

carryin" amount of inventories pled"ed as security for liabilities cost of inventories reco"nised as e2pense (cost of "oods sold!. IAS 2 ac9nowled"es that some enterprises classify income statement e2penses by nature (materials# labour# and so on! rather than by function (cost of "oods sold# sellin" e2pense# and so on!. Accordin"ly# as an alternative to disclosin" cost of "oods sold e2pense# IAS 2 allows an entity to disclose operatin" costs reco"nised durin" the period by nature of the cost (raw materials and consumables# labour costs# other operatin" costs! and the amount of the net chan"e in inventories for the period!. :IAS 2.).< This is consistent with IAS * Presentation of Financial Statements# which allows presentation of e2penses by function or nature.