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Ias 2

IAS 2 provides guidance on accounting for inventories. Inventories are assets held for sale, in production for sale, or materials used in production. They must be controllable and probable to generate future economic benefits. Inventories are valued at the lower of cost or net realizable value, with cost determined by actual cost, FIFO, or weighted average methods. Disclosures include inventory accounting policies, classifications and amounts, write-downs, and reversals.

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93 views2 pages

Ias 2

IAS 2 provides guidance on accounting for inventories. Inventories are assets held for sale, in production for sale, or materials used in production. They must be controllable and probable to generate future economic benefits. Inventories are valued at the lower of cost or net realizable value, with cost determined by actual cost, FIFO, or weighted average methods. Disclosures include inventory accounting policies, classifications and amounts, write-downs, and reversals.

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OLANIYI DANIEL
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IAS 2: INVENTORIES

Definition of inventory
Inventory is described as an asset that is held for sale in the ordinary course of business or
consumed in the production process or in rendering of services. Examples are finished goods, raw
materials and work-in-progress, stores, spare parts and consumables.

Inventories are:
Assets held for sale. For a retailer, these are items that the business sells – its stock-in trade. For a
manufacturer, assets held for sale are usually referred to as ‘finished goods’
Assets in the process of production for sale (‘work-in-progress’ for a manufacturer)
Assets in the form of materials or supplies to be used in the production process (‘raw materials’ in
the case of a manufacturer).
Recognition Criteria
Items of inventories are to be recognised if:
 Provided the reporting entity has control and the control was obtained before reporting date
 It is probable that future economic benefits will flow to the entity
 And the value of the inventory could be measured reliably
Measurement of Inventories
IAS 2 -Inventories stated that, inventory should be valued at lower of COST and NET
REALISABLE VALUE (NRV)
Measure @ lower of

Cost NRV
Cost: This consists of all the costs of purchase, plus the costs of conversion and other costs
incurred in bringing the inventories to their present location and condition.
Costs of purchase include the cost of the item itself (less any trade discounts) plus import duties,
transport costs, other handling costs and any other directly attributable costs.
Costs of conversion are the ‘internal costs’ incurred in getting the inventory into its current state.
They include both direct costs (such as labour and expenses) and a share of production overheads,
where production overhead absorption rates are based on normal levels of activity.
Inventory cost should not include:
 Abnormal waste
 Storage costs
 Administrative overheads unrelated to production
 Selling and distribution expenses
 Foreign exchange differences arising directly on the recent acquisition of inventories
invoiced in a foreign currency
 Interest cost when inventories are purchased with deferred settlement terms
Net Realisable Value (NRV): This is the estimated selling price in the ordinary course of business,
less all the (estimated) costs to make the item ready for sale, and all the (estimated) costs necessary
to make the sale.
IAS 2 comments that the practice of writing down inventories below cost to their net realisable
value is consistent with the view that assets should not have a carrying value in the statement of
financial position that exceeds the amount expected to be realised from their sale or use.
In measuring inventory therefore, follow the following steps
i. Identify the cost of each inventory items,
ii. Calculate the Net Realisable Value of each inventory items
iii. Compare the cost and NRV of each component of inventory and pick the lover.
Methods of Inventory Valuation per IAS 2: IAS 2 allows three methods for measuring the cost
of inventories.
 Actual cost
 First-in, first-out (FIFO)
 Weighted average cost (AVCO).

i. Actual cost: This is used where items can be individually traced. This is usual for high-
value items. For example, cars for sale in a car dealer’s showroom will normally be valued
at actual cost in the financial statements of the car dealer.
ii. First In First Out (FIFO) Method: The FIFO method assumes that inventories purchased
or produced first are sold first, such that the remaining inventories are those that have been
most recently purchased or produced
iii. Weighted Average Method: The cost of each item is determined from the weighted
average of the cost of similar items existing at the beginning of a period and the cost of
those items purchased or produced during the period.

Disclosure requirements for inventory


IAS 2 requires the following disclosures in notes to the financial statements.
i. The accounting policy adopted for measuring inventories, including the cost valuation
method used.
ii. The total carrying amount of inventories, classified appropriately. (For a manufacturer,
appropriate classifications will be raw materials, work-in progress and finished goods.)
iii. The amount of inventories carried at net realisable value or NRV.
iv. The amount of inventories written down in value, and so recognised as an expense during
the period.
v. Amount of any reversal of a written down to NRV and the circumstances that have led to
such reversal.
vi. Carrying amount of inventories pledged as security for liabilities
vii. Cost of inventories recognised as expenses (Cost of goods sold)

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