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IAS 2 — Inventories
Financial Accounting For Companies (ACC 217)
Midlands State University
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IAS 2 — Inventories
Overview
IAS 2 In ven to ries contains the re quire ments on how to account for most types of inventory. The standard requires in ven ‐ to ries to be measured at the lower of cost and net re al is able value (NRV) and outlines ac cept able methods of de ter min ‐ ing cost, including specific iden ti fi ca tion (in some cases), first-in first-out (FIFO) and weighted average cost.
A revised version of IAS 2 was issued in December 2003 and applies to annual periods beginning on or after 1 January 2005.
History of IAS 2
Date De vel op ment Comments September 1974 Exposure Draft E2 Valuation and Pre sen ta tion of In ven to ries in the Context of the His tor i cal Cost System published October 1975 IAS 2 Valuation and Pre sen ta ‐ tion of In ven to ries in the Context of the His tor i cal Cost System issued August 1991 Exposure Draft E38 In ven to ries published December 1993 IAS 9 (1993) In ven to ries issued
Operative for annual fi‐ nancial state ments cover‐ ing periods beginning on or after 1 January 1995 18 December (iasplus/en/news/2003/December/news753)
IAS 2 In ven to ries issued Effective for annual peri‐ ods beginning on or after 1 January 2005
Related In ter pre ta tions
IFRIC 20 (iasplus/en/standards/ifric/ifric20) Stripping Costs in the Pro duc tion Phase of a Surface Mine SIC-1 (iasplus/en/standards/sic/sic-1) Con sis tency - Different Cost Formulas for In ven to ries. SIC-1 was su per seded by and in cor po rated into IAS 2 (Revised 2003).
Summary of IAS 2
Objective of IAS 2
The objective of IAS 2 is to prescribe the accounting treatment for in ven to ries. It provides guidance for de ter min ing the cost of in ven to ries and for sub se quently recog nis ing an expense, including any write-down to net re al is able value. It also provides guidance on the cost formulas that are used to assign costs to in ven to ries.
Scope
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In ven to ries include assets held for sale in the ordinary course of business (finished goods), assets in the pro duc tion process for sale in the ordinary course of business (work in process), and materials and supplies that are consumed in pro duc tion (raw materials). [IAS 2]
However, IAS 2 excludes certain in ven to ries from its scope: [IAS 2]
work in process arising under con struc tion contracts (see IAS 11 (iasplus/en/standards/ias/ias11) Con struc tion Contracts ) financial in stru ments (see IAS 39 (iasplus/en/standards/ias/ias39) Financial In stru ments: Recog ni tion and Mea sure ment ) bi o log i cal assets related to agri cul tural activity and agri cul tural produce at the point of harvest (see IAS 41 (iasplus/en/standards/ias/ias41) Agri cul ture ).
Also, while the following are within the scope of the standard, IAS 2 does not apply to the mea sure ment of in ven to ries held by: [IAS 2]
producers of agri cul tural and forest products, agri cul tural produce after harvest, and minerals and mineral prod‐ ucts, to the extent that they are measured at net re al is able value (above or below cost) in ac cor dance with well- es tab lished practices in those in dus tries. When such in ven to ries are measured at net re al is able value, changes in that value are recog nised in profit or loss in the period of the change commodity brokers and dealers who measure their in ven to ries at fair value less costs to sell. When such in ven ‐ to ries are measured at fair value less costs to sell, changes in fair value less costs to sell are recog nised in profit or loss in the period of the change.
Fun da men tal principle of IAS 2
In ven to ries are required to be stated at the lower of cost and net re al is able value (NRV). [IAS 2]
Mea sure ment of in ven to ries
Cost should include all: [IAS 2]
costs of purchase (including taxes, transport, and handling) net of trade discounts received costs of con ver sion (including fixed and variable man u fac tur ing overheads) and other costs incurred in bringing the in ven to ries to their present location and condition
IAS 23 (iasplus/en/standards/ias/ias23) Borrowing Costs iden ti fies some limited cir cum stances where borrowing costs (interest) can be included in cost of in ven to ries that meet the de fi n i tion of a qual i fy ing asset. [IAS 2 and IAS 23]
Inventory cost should not include: [IAS 2 and 2]
abnormal waste storage costs ad min is tra tive overheads unrelated to pro duc tion selling costs foreign exchange dif fer ences arising directly on the recent ac qui si tion of in ven to ries invoiced in a foreign currency interest cost when in ven to ries are purchased with deferred set tle ment terms.
The standard cost and retail methods may be used for the mea sure ment of cost, provided that the results ap prox i mate actual cost. [IAS 2-22]
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IAS 2 — Inventories
Course: Financial Accounting For Companies (ACC 217)
University: Midlands State University
