Inventory in IAS 2:

Inventory:

The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that is ready or will be ready for sale.

Objectives of IAS 2:

Provide guidance about the accounting treatment for inventories. It provides guidance about inventories in following ways

When inventory is purchased, how it should be recorded

When inventory should be recorded as an expense

Scope:

The following 3 types of inventories are included in IAS 2

o   Finished goods

o   Work in process

o   Raw material

The following inventories are not included in IAS 2

o   Work in process arising under construction contracts

o   Financial instruments e.g. shares and bonds

o   Biological assets related to agricultural activity and agricultural produce at the point of harvest e.g. cattle and crops

Fundamental Principle of IAS 2:

Inventories are required to be stated at the lower of cost and net realizable value (NRV).

Measurement of Inventories:

Cost should include all:

• costs of purchase (including taxes, transport, and handling)
• costs of conversion i.e. labour and overhead
• other costs incurred in bringing the inventories to their present location and condition

Note:

In some circumstances borrowing cost is also included in cost of inventory

The following cost is not included in the inventory cost;

·         Abnormal waste

·         Storage costs

·         Administrative FOH unrelated to production

·         Selling costs

·         Foreign exchange differences

·         Interest cost when inventories are purchased with deferred settlement terms

Cost Formulas:

·         Items which are not ordinarily interchangeable should be valued at individual cost basis.

·         For interchangeable items FIFO and Weighted Average Cost methods are used.

Write-Down to Net Realizable Value:

·         NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale.

·         Any write-down to NRV should be recognized as an expense in the period in which the write-down occurs.

·         Any reversal should be recognized in the income statement in the period in which the reversal occurs.

Expense Recognition:

IAS 18 Revenue:

When inventories are sold and revenue is recognized, the carrying amount of those inventories is recognized as an expense.

[IAS 2.34]

Any write-down to NRV and any inventory losses are also recognized as an expense when they occur.

Disclosure

• accounting policy for inventories
• Carrying amount, of merchandise, supplies, materials, work in progress, and finished goods.
• carrying amount of any inventories carried at fair value less costs to sell