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IAS 2: Accounting for Inventories Guide

IAS 2 provides guidance on accounting for inventories. It defines inventories as assets held for sale, in production for sale, or in the form of materials or supplies to be consumed in production. Inventories must be measured at the lower of cost or net realizable value, with cost determined using specific identification, FIFO, or weighted average methods. When inventories are sold, their cost is recognized as an expense. Disclosures include categories of inventories, amounts written down or reversed, and policies for measurement and recognition.

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6 views3 pages

IAS 2: Accounting for Inventories Guide

IAS 2 provides guidance on accounting for inventories. It defines inventories as assets held for sale, in production for sale, or in the form of materials or supplies to be consumed in production. Inventories must be measured at the lower of cost or net realizable value, with cost determined using specific identification, FIFO, or weighted average methods. When inventories are sold, their cost is recognized as an expense. Disclosures include categories of inventories, amounts written down or reversed, and policies for measurement and recognition.

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Magsael, Ma. Cielo B.

AC 501
Ruiz, Gillen Chelzea E.
Sarmiento, Raniella D.
Talatala, Sharmaine S.

IAS 2 – INVENTORIES

IAS 2 prescribes the accounting treatment for inventories. It contains guidelines for determining

cost of inventories and for subsequently recognizing it as an expense. It also includes the

guidance on the cost formulas which are used to assign inventory costs.

I. Recognition

Inventories are assets that are:

a) Held for sale in ordinary course of business (finished goods);

b) In the production process for sale in the ordinary course of business (work in

process); and

c) Materials and supplies which are used in production (raw materials).

II. Measurement

Primarily, inventories must be stated at the lower of cost and net realizable value.

Net realizable value is the estimated selling price less the estimated cost of completion

and the estimated cost to sell.

Cost of inventories includes (may also be called as inventoriable costs):

1. Cost of purchase, net of trade discounts (including taxes, freight, and handling

costs);

2. Cost of conversion (includes both fixed and variable manufacturing overheads);


3. Other costs incurred in bringing the inventories to their present location and

condition.

The cost of inventories is assigned by:

1. Specific identification of costs for items that are not interchangeable; and

2. The first-in, first-out or weighted average cost formula for items that are ordinarily

interchangeable.

Inventory cost must not include the following:

 Abnormal waste

 Storage costs

 Administrative overheads unrelated to production

 Selling costs

 Foreign exchange differences arising from acquisition of inventories in a foreign

currency

 Interest cost

III. Expense Recognition

When inventories are sold, the carrying amount of those inventories is recognized as an

expense in the same period the related revenues are recognized. It is often called as cost

of goods sold. Any amount of write-down of inventories to net realizable value and any

inventory losses are also recognized as an expense in the period they occur.

Any reversal of an inventory write-down should be recognized in the income statement in

the period in which the reversal occurs.

IV. Presentation
The inventories shall be presented as a line item in the statement of financial position but

its details must be disclosed in the notes to financial statements.

V. Disclosure

Required disclosures of inventory include:

 The accounting policies for inventories;

 The carrying amount of inventories by category (classifications depend on what is

appropriate for the entity);

 The carrying amount of inventories carried at fair value less cost to sell;

 Amount of any write-down of inventories recognized in the period;

 Any amount of reversal of a write-down to NRV and the circumstances that led to

such reversal;

 Amount of inventories pledge as a security for liabilities; and

 Cost of inventories recognized as expense.

Reference:

IAS plus. (2012, July 17). IAS 2-Inventories. Retrieved from

[Link]

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