IAS 2 INVENTORIES

(Effective Date : Periods beginning on or after 1 January 2005)

Definition
Inventories are assets:

• Held for sale in ordinary course of business.

• In the process of production for such sale (WIP).
• In the form of materials or supplies to be consumed in the production process or in the rendering of services.

INVENTORIES (Closing Inventories) ARE MEASURED AT THE LOWER OF COST AND

NET REALISABLE VALUE (NRV) (This is an implicit impairment test, thus inventories are excluded from the scope of IAS 36 Impairment of Assets)

dy
COST

ud
Includes:

• Costs of purchase, including non-recoverable taxes.

• Transport and handling.
• Net of trade volume rebates.

B
• Costs of conversion.
• Other costs incurred in bringing the inventories
to their present location and condition.

Excludes:

• Abnormal waste.
• Storage costs (unless necessary for the production process).
• Admin overheads not related to production.
u dy
St
• Selling costs.
• Interest cost (where settlement is deferred).
• IAS 23 Borrowing Costs identifies rare circumstances
where borrowing costs can be included.
FR

Cost Formulas:

For non-interchangeable items: Specific identification.

For interchangeable items, either:
• Weighted average cost (AVCO).
&

• FIFO or

Use of LIFO is prohibited.

N.B. If company changes its inventory valuation method from FIFO to weighted average (AVCO) method then it is basically changing the Accounting Policy (IAS-8)
FA

Note : Usually during Inventory Valuation The Cost is Lower than The NRV, But if for any items subsequently The NRV will become Lower than its Cost (Damaged/Obsolete Inventories)
then the Inventory valuation should be adjusted again after the end of the reporting Period (IAS 10).
A

NET REALISABLE VALUE (NRV)

C

The net realisable value of an item is essentially its net selling proceeds after all costs have been deducted.
It is calculated as:
C

$
Estimated selling price X
A

less: estimated costs of completion (X)

less: estimated selling and distribution costs (X)
----
Net Realisable Value (NRV) X
===

P-5 Find us at Facebook - ACCA FA & FR Study Buddy