Group-12
Assignment-2
AIS-1201 & 1206
Md. Harunor Roshid
Roll:250303034
Summary of IAS-2(Inventories)
Definitions
Inventories are assets that are held for sale in the ordinary course of
business, in the process of production for such sale, or in the form of raw
materials and supplies to be consumed in production or service rendering.
Net realisable value (NRV) refers to the estimated selling price minus the
costs of completion and selling expenses, while fair value represents the
market-based price at which an asset can be sold in an orderly transaction.
Objective
The objective of IAS 2 is to prescribe the accounting treatment of
inventories.
It mainly deals with how the cost of inventories is determined, how they are
recognized as assets ,and how they are recognized as expenses when the
related goods are sold .The standard also provides guidance on cost
formulas and valuation methods to ensure consistency and accuracy.
Scope
IAS 2 applies to all inventories ,however, it excludes certain items such as
financial instruments, biological assets related to agricultural activity, and
inventories held by broker-traders that are measured at fair value less costs
to sell. These exceptions are covered under other relevant standards.
Measurement of Inventories
According to IAS 2, inventories must be measured at the lower of cost and
net realisable value. This ensures that inventories are not overstated and
reflects a conservative approach in financial reporting.
Cost of Inventories
The cost of inventories includes all costs incurred in bringing the inventory to
its present location and condition. This includes the cost of purchase (such as
purchase price, duties, and transport), cost of conversion (direct labour and
production overheads), and other relevant costs like design expenses.
However, abnormal costs, unnecessary storage costs, administrative
expenses, and selling costs are excluded and treated as expenses.
Net Realisable Value (NRV)
Inventories should be written down to NRV when their cost is not recoverable
due to damage, obsolescence, or a decline in selling price. If the conditions
improve later, the write-down can be reversed, but only up to the original
amount.
Recognition as an Expense
When inventories are sold, their carrying amount is recognized as an
expense in the form of cost of sales. Any write-down or loss is also
recognized as an expense, while any reversal reduces the expense in the
relevant period.
Disclosure
Financial statements must disclose important information regarding
inventories, including the accounting policies used, cost formulas applied,
total carrying amount of inventories, amount recognized as expense, any
write-downs and reversals, and inventories pledged as security. This ensures
transparency and helps users understand the financial position of the entity.