Accounting-Ias

Inventories (IAS 2)

1 PROBLEMS ADDRESSED

The objective of IAS 2 is to prescribe the accounting treatment of inventories. This Standard deals with calculation of the cost of inventory recognized as an asset, the determination of cost, the recognition of inventories as an expense, and any write-downs to net realizable value.

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 based on E32)

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)

2 SCOPE OF THE STANDARD

This Standard deals with all inventories of assets that are:

• Held for sale in the ordinary course of business

• In the process of production for sale

• In the form of materials or supplies to be consumed in the production process

• In the rendering of services

In the case of a service provider, inventories include the costs of the service for which the related revenue has not yet been recognized (for example, the work in progress of auditors, architects, and lawyers).

IAS 2 does not apply to the measurement of inventories held by producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products to the extent that they are measured at net realizable value in accordance with well-established practices in those industries.

IAS 2 also does not apply to living plants and animals and harvested agricultural produce derived from those plants and animals (see IAS 41, chapter 27).

3 KEY CONCEPTS

3.1 Inventories should be measured at the lower of cost and net realizable value.

3.2 Cost of inventories comprises all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.

3.3 The net realizable value (NRV) is the estimated selling price less the estimated costs of completion and costs necessary to make the sale.

3.4 When inventories are sold, the carrying amount of the expenses should be recognized as an expense in the period in which the related revenue is recognized (see Chapter 17).

3.5 The amount of any write-down of inventories to net realizable value and all losses of inventories should be recognized as an expense in the period of the write-down or loss.

4 ACCOUNTING TREATMENT

4.1 Cost of inventories comprises:

• Purchase costs, such as the purchase price and import charges

• Costs of conversion

• direct labor

• production overheads, including variable overheads and fixed overheads allocated at normal production capacity

• Other costs, such as design and borrowing costs

4.2 The cost of inventories excludes:

• Abnormal amounts of wasted materials, labor, and overheads

• Storage costs, unless they are necessary prior to a further production process

• Administrative overheads

• Selling costs

4.3 The cost of inventories that are not ordinarily interchangeable and those produced and segregated for specific projects are assigned by specific identification of their individual costs.

4.4 The cost of other inventories is assigned by using either of the following cost formulas:

• Weighted average cost

• FIFO

4.5 The following techniques can be used to measure the cost of inventories if the results approximate cost:

Standard cost:

• Normal levels of materials, labor, and actual capacity should be taken into account.

• The standard cost should be reviewed regularly in order to ensure that it approximates actual costs.

Retail method:

• Sales value should be reduced by gross margin to calculate cost.

• Average percentage should be used for each homogeneous group of items.

• Marked-down prices should be taken into consideration.

4.6 NRV is the estimated selling price less the estimated costs of completion and costs necessary to make the sale. These estimates are based on the most reliable evidence at the time the estimates are made. The purpose for which the inventory is held should be taken into account at the time of the estimate. Inventories are usually written down to NRV based on the following principles:

• Items are treated on an item-by-item basis.

• Similar items are normally grouped together.

• Each service is treated as a separate item.

4.7 IAS 2 does not apply to the following inventory assets which are covered by other standards:

• work in progress under construction contracts.

• financial instruments.

• biological assets related to agricultural activity and agricultural produce at the point of harvest.

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