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Assets · IAS 2

IAS 2 Inventories

Summary, key points, exam traps and a worked example — written for ICAP, ACCA, ICAI, CIMA and ICAEW students.

On this page
  1. Objective
  2. Scope
  3. Key definitions
  4. Recognition & measurement
  5. Key disclosures
  6. Common exam traps
  7. Worked example
  8. Related standards
  9. Practise MCQs

Objective

Explains how to determine the cost of inventories, how to expense it, and when to write inventories down to net realisable value.

Scope

  • Goods held for sale, work in progress, and materials or supplies used in production or in rendering services.
  • Excludes financial instruments and biological assets/agricultural produce at the point of harvest (IAS 41).
  • Commodity broker-traders and producers of agricultural and mineral products measuring at net realisable value or fair value less costs to sell are outside the measurement rules.

Key definitions

Inventories
Assets held for sale in the ordinary course of business, in the process of production for such sale, or materials and supplies to be consumed in production or rendering services.
Net realisable value (NRV)
Estimated selling price in the ordinary course of business, less estimated costs of completion and estimated costs needed to make the sale. It is entity-specific, unlike fair value.

Recognition & measurement

Measurement

  • Measure at the lower of cost and NRV, normally item by item (similar or related items may be grouped).
  • Cost includes purchase price, import duties and non-recoverable taxes, transport and handling, less trade discounts and rebates.
  • Conversion costs include direct labour plus a systematic allocation of fixed and variable production overheads.
  • Fixed production overheads are allocated on normal capacity; unallocated overheads from low production are expensed. In periods of abnormally high production the per-unit amount is reduced so inventory is not above cost.
  • Exclude abnormal waste, storage costs (unless necessary in the production process before a further stage), administrative overheads not related to production, and selling costs.

Cost formulas

  • Use specific identification for items that are not ordinarily interchangeable or are produced for specific projects.
  • Otherwise use FIFO or weighted average cost, applied consistently to inventories of similar nature and use.
  • LIFO is not permitted.
  • Standard cost or the retail method may be used if the result approximates cost.

Expense recognition

  • The carrying amount is expensed when the related revenue is recognised.
  • Write-downs to NRV and losses are expensed in the period they occur.
  • A write-down is reversed (up to original cost) if NRV later increases because circumstances change.

Key disclosures

  • Accounting policies and cost formula used.
  • Total carrying amount, analysed into suitable classifications (e.g. raw materials, WIP, finished goods).
  • Amount expensed in the period, write-downs, and any reversals with the reason.
  • Carrying amount of inventories pledged as security.

Common exam traps

  • Selling costs reduce NRV but are never added to cost.
  • The lower of cost and NRV comparison is item by item, not total cost versus total NRV.
  • Raw materials are not written down if the finished goods they go into are expected to sell at or above cost.
  • Idle-capacity overheads go to profit or loss, not inventory.
  • Information about selling prices after the year end is usually an adjusting event under IAS 10.

Worked example: Lower of cost and NRV

Scenario. An entity holds 1,000 units costing $50 each. At the year end each unit needs further work costing $8 and can then be sold for $60, with selling commission of $5 per unit.

  1. NRV per unit = 60 − 8 − 5 = $47.
  2. Cost per unit = $50, which is higher than NRV.
  3. Write-down = (50 − 47) × 1,000 = $3,000, recognised as an expense.

Answer: Inventory is carried at $47,000 (1,000 × $47).

Practise MCQs on this standard

Test your understanding of IAS 2 with free chapter-wise MCQs and explanations in these question banks.

CAF-1 Financial Accounting and ReportingICAP CAFACCA FA Financial AccountingACCAACCA FR Financial ReportingACCACAF-6 Corporate ReportingICAP CAFCIMA BA3 Fundamentals of Financial AccountingCIMA Certificate in Business AccountingICAEW AF Accounting FundamentalsICAEW ACA Certificate LevelCA Inter P1 Advanced AccountingICAI CA Intermediate

ICAI CA Intermediate examines Indian Accounting Standards, which are based on but can differ from IFRS. Check your syllabus.

Read the official IAS 2 text on ifrs.org