FUNDAMENTAL PRINCIPLE
SCOPE OF PAS 2.
PAS 2, paragraph 6 defines inventories as assets which
are held for sale in the ordinary course of business, in the
process of production for such sale or in the form of
materials or supplies to be consumed in the process of
production or in the rendering of services.
PAS 2, paragraph 2. Items not included in the scope
of PAS 2. It includes;
 work in process arising under construction
contracts.
 financial instruments.
 biological assets related to agricultural activity
and agricultural produce at the point of harvest
PAS 2, paragraph 3, provides that while the following
are within the scope of the standard, IAS 2 does not
apply to the measurement of inventories held by:
 producers of agricultural and forest products,
agricultural produce after harvest, and minerals and
mineral products, to the extent that they are
measured at net realisable value (above or below
cost) in accordance with well-established practices
in those industries. When such inventories are
measured at net realisable value, changes in that
value are recognised in profit or loss in the period of
the change
 commodity brokers and dealers who measure their
inventories at fair value less costs to sell. When such
inventories are measured at fair value less costs to
sell, changes in fair value less costs to sell are
recognised in profit or loss in the period of the
MEASUREMENT
PAS 2, paragraph 9, provides that inventories are
required to be stated at the lower of cost and net
realizable value (LCNRV).
PAS 2: Accounting
treatment for
Inventories
EXPENSE
RECOGNITION
PAS 2, paragraph 34, provides that, when
inventories are sold and revenue is recognised, the
carrying amount of those inventories is recognised as
an expense (often called cost-of-goods-sold). Any
write-down to NRV and any inventory losses are also
recognised as an expense when they occur.
PAS 2, paragraph 10 provides that cost should include all of
the following;
 Cost of purchase (including taxes, transport, and
handling ) net if trade discounts received.
 Cost of conversion (including fixed and variable
manufacturing overhead).
 Other cost incurred in bringing the inventories to
their present location and condition.
PAS 2, paragraph 16 and 18, provides that inventory
cost should not include the following;
 Abnormal waste
 Storage cost
 Administrative overheads unrelated to
production.
 Selling cost
 Foreign exchange differences arising directly
on the recent acquisition of inventories invoice
in foreign currency.
 Interest cost when inventories are purchased
with deferred settlement terms..
PAS 2 does not permit anymore the use of LIFO as an
alternative formula in measuring the cost of inventories.
Paragraph 23, provides that the cost of inventories that are not
ordinarily interchangeable and inventories that are segregated for
specific project shall be determined by using Specific
identification method.