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IAS 2

International Accounting Standard 2

Inventories

Target
1 The objective of this Standard is to prescribe the accounting treatment of inventories. A fundamental issue
in the accounting for inventories is the amount of cost that should be recognized as an asset, to be deferred
until the related revenue is recognized. This Standard provides practical guidance for the determination of
that cost, as well as for the subsequent recognition as an expense for the period, including any impairment
that reduces the carrying amount to net realizable value. It also provides guidance on the cost formulas used
to attribute costs to inventories.

Scope
2 This Standard applies to all inventories except for:
(a) [deleted]
(b) financial instruments (see IAS 32 Financial Instruments: Presentation and IFRS 9 Financial
Instruments); and
(c) biological assets related to agricultural activity and agricultural products at the point of
harvest (see IAS 41 Agriculture).
3 This Standard does not apply to the measurement of inventories held by:
(a) Producers of agricultural and forestry products, agricultural products after harvesting or
collection, minerals and mineral products, provided that they are measured at net
realizable value, in accordance with well-established practices in those industrial sectors. In
the event that such inventories are measured at net realizable value, changes in net
realizable value are recognized in the income statement for the period in which such
changes occur.
(b) Intermediaries that trade in listed commodities, provided that they measure their
inventories at fair value less costs to sell. In the event that such inventories are carried at
fair value less costs to sell, changes in the amount of fair value less costs to sell are
recognized in profit or loss in the period in which such changes occur.
4 The inventories referred to in paragraph 3(a) are measured at net realizable value at certain stages of
production. This occurs, for example, when agricultural crops have been harvested or minerals have been
extracted, provided that their sale is assured by a forward contract of any kind or guaranteed by the
government, or when there is an active market and the risk of failure to sell is minimal. Such inventories are
excluded only from the measurement requirements of this Standard.
5 Trading intermediaries are those who buy or sell listed commodities for their own account or for the
account of third parties. The inventories referred to in paragraph 3 (b) are acquired principally for the
purpose of selling them in the near future and generating a profit from price fluctuations or a trading
margin. When such inventories are carried at fair value less costs to sell they are excluded only from the
measurement requirements of this Standard.

Definitions
6 The following terms are used in this Standard with the meanings specified below:
Inventories are assets:
(a) owned to be sold in the normal course of business;
(b) in the production process with a view to such sale; or

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(c) in the form of materials or supplies to be consumed in the production process or in the
provision of services.
Net realizable value is the estimated selling price of an asset in the normal course of business less the
estimated costs to complete production and those necessary to make the sale.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date (see IFRS 13 Fair Value
Measurement).
7 Net realizable value refers to the net amount that the entity expects to realize from the sale of the inventory
in the normal course of business. Fair value reflects the price at which an orderly transaction would take
place to sell the same inventory in the principal (or most advantageous) market for that inventory between
market participants at the measurement date. The former is an entity-specific value, whereas the latter is
not. The net realizable value of inventories may not equal fair value less costs to sell.
8 Inventories also include goods purchased and held for resale, including, for example, merchandise
purchased by a retailer for resale to its customers, as well as land or other investment property held for sale
to third parties. Inventories also include finished goods or work in progress held by the entity, as well as
materials and supplies to be used in the production process. Costs incurred to fulfill a contract with a
customer that do not give rise to inventories (or assets within the scope of another Standard) are accounted
for in accordance with IFRS 15 Revenue from Contracts with Customers.

Inventory measurement
9 Inventories are measured at the lower of cost or net realizable value.

Cost of inventories
10 The cost of inventories will include all costs derived from their acquisition, transformation and other
costs incurred to bring them to their present condition and location.

Acquisition costs
11 The acquisition cost of inventories shall include the purchase price, import duties and other taxes (not
subsequently recoverable from the tax authorities) and transportation, handling and other costs directly
attributable to the acquisition of goods, materials and services. Trade discounts, rebates and other similar
items shall be deducted in determining the acquisition cost.

Transformation costs
12 Inventory transformation costs shall include those costs directly related to the units of production, such as
direct labor. They shall also include a systematic allocation of indirect production costs, variable or fixed,
incurred in transforming raw materials into finished goods. Fixed indirect production costs are those that
remain relatively constant, regardless of the volume of production, such as depreciation and maintenance of
factory buildings and equipment and right-of-use assets used in the production process, as well as the cost
of plant management and administration. Indirect variable production costs are those that vary directly, or
almost directly, with the volume of production obtained, such as materials and indirect labor.
13 The process of allocating fixed indirect costs to transformation costs will be based on the normal working
capacity of the means of production. Normal capacity is the production expected to be achieved under
normal circumstances, considering the average of several periods or seasons, and taking into account the
loss of capacity resulting from planned maintenance operations. The actual level of production may be used
as long as it approximates normal capacity. The amount of fixed indirect cost allocated to each unit of
production shall not be increased as a result of a low level of production or the existence of idle capacity.
Unallocated indirect costs are recognized as expenses for the period in which they are incurred. In periods
of abnormally high production, the amount of indirect cost allocated to each production unit shall be
decreased, so that it does not

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inventories are valued above cost. Indirect variable costs will be distributed to each unit of production on
the basis of the actual level of use of the means of production.
14 The production process may result in the simultaneous production of more than one product. This is the
case, for example, of joint production or the production of main products together with by-products. Where
the processing costs of each type of product are not separately identifiable, the total cost should be allocated
among the products using a uniform and rational basis. The allocation may be based, for example, on the
relative sales value of each product either as in-process production, at the time the products become
separately identifiable, or when the production process is completed. Most by-products, by their very
nature, do not have a significant value. When this is the case, they are often measured at net realizable value
by deducting that amount from the cost of the main product. As a result of this allocation, the carrying
amount of the main product will not be significantly different from its cost.

Other costs
15 Other costs are included in the cost of inventories to the extent that they were incurred in bringing the
inventories to their present location and condition. For example, it may be appropriate to include, as a cost
of inventories, some indirect costs not derived from production, or the costs of designing products for
specific customers.
16 Examples of costs excluded from the cost of inventories, recognized as expenses in the period in which
they are incurred, are as follows:
(a) abnormal amounts of wasted materials, labor or other production costs;
(b) storage costs, unless they are necessary in the production process, prior to further processing;
(c) indirect administrative costs that have not contributed to the inventories' current condition and
location; and
(d) costs of sales.
17 IAS 23 Borrowing Costs identifies the limited circumstances in which finance costs are included in the cost
of inventories.
18 An entity may acquire inventories on a deferred payment basis. When the arrangement in fact contains a
financing element, for example, the difference between the purchase price on normal credit terms and the
amount paid, this element is recognized as interest expense over the financing period.
19 [Deleted]

Cost of agricultural products harvested from biological assets

20 In accordance with IAS 41 Agriculture, inventories comprising agricultural produce that an entity has
harvested or gathered from its biological assets shall be measured, for initial recognition, at fair value less
costs to sell at the time of harvesting or gathering. This will be the cost of inventories at that date for the
application of this Standard.

Cost measurement techniques

21 Techniques for measuring the cost of inventories, such as the standard cost method or the retail method,
may be used for convenience as long as the result of applying them approximates cost. Standard costs shall
take into account normal levels of raw materials, supplies, labor, efficiency and capacity utilization. These
will be reviewed on a regular basis and, if necessary, changed based on current conditions.
22 The retail method is often used in the retail trade for inventory measurement when there are a large number
of rapidly rotating items that have similar margins and for which it is impracticable to use other costing
methods. When this method is used, the cost of inventories shall be determined by deducting, from the
selling price of the item in question, an appropriate gross margin percentage. The percentage applied will
take into account the portion of the inventories that have been marked down below their original selling
price. Often an average percentage is used for each business section or department.

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Costing formulas
23 The cost of inventories of products that are not normally interchangeable with each other, as well as
of goods and services produced and segregated for specific projects, will be determined through the
specific identification of their individual costs.
24 Specific identification of cost means that each specific type of cost is distributed among certain identified
items within inventories. This is the appropriate treatment for products that are segregated for a specific
project, regardless of whether they were purchased or produced. However, specific identification of costs
will be inappropriate when, in inventories, there are a large number of products that are routinely
interchangeable. In these circumstances, the method of selecting which individual products are to remain in
final stock could be used to obtain predetermined effects on the result for the period.
25 The cost of inventories, other than those dealt with in paragraph 23, shall be allocated using the first-
in, first-out (FIFO) or weighted average cost methods. An entity shall use the same cost formula for
all inventories that have a similar nature and use. For inventories with a different nature or use,
different cost formulas may be justified.
26 For example, within the same entity, inventories used in one operating segment may have a different use
than the same type of inventories in another operating segment. Notwithstanding the foregoing, the
difference in the geographic location of the inventories (or in the corresponding tax rules) is not, by itself,
sufficient reason to justify the use of different cost formulas.
27 The FIFO formula assumes that the products in inventory purchased or produced earlier will be sold first
and, consequently, that the products remaining in final stock will be those produced or purchased more
recently. If the weighted average cost method or formula is used, the cost of each unit of product is
determined from the weighted average of the cost of similar items held at the beginning of the period and
the cost of the same items purchased or produced during the period. The average may be calculated
periodically or after receipt of each additional shipment, depending on the entity's circumstances.

Net realizable value

28 The cost of inventories may not be recoverable if they are damaged, if they have become partially or totally
obsolete, or if their market prices have fallen. Also, the cost of inventories may not be recoverable if the
estimated costs of completion or sale have increased. The practice of writing down the balance until cost
equals net realizable value is consistent with the view that assets should not be carried in excess of the
amounts expected to be realized through sale or use.
29 Generally, the write-down to net realizable value is calculated for each inventory item. In some
circumstances, however, it may be appropriate to group similar or related items together. This may be the
case for inventory items related to the same product line, which have similar purposes or end uses, are
produced and sold in the same geographical area and cannot, for practical reasons, be evaluated separately
from other items in the same line. It is not appropriate to make write-downs from line items that reflect
complete classifications of inventories, for example on all finished goods, or on all inventories in a given
operating segment.
30 Estimates of net realizable value shall be based on the most reliable information available at the time the
estimates are made about the amount for which inventories are expected to be realized. These estimates
shall take into consideration price or cost fluctuations directly related to events occurring after the end of
the reporting period, to the extent that such events confirm conditions existing at the end of the period.
31 In making estimates of net realizable value, consideration is given to the purpose for which the inventories
are held. For example, the net realizable value of the amount of inventories held to fulfill sales or service
contracts is based on the contract price. If the sales contracts are for a quantity less than that reflected in
inventories, the net realizable value of the excess is determined on the basis of general sales prices.
Provisions or contingent liabilities may arise for firm sales contracts in excess of the quantities of products
in stock or products to be obtained under firm purchase contracts. These provisions or contingent liabilities
are treated for accounting purposes in accordance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets.

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32 Raw materials and other supplies held for use in the production of inventories are not written down to bring
their carrying amount below cost if the finished goods in which they are incorporated are expected to be
sold at or above cost. However, when a reduction in the price of raw materials indicates that the cost of
finished goods will exceed their net realizable value, their carrying amount is reduced to cover the
difference. In these circumstances, the replacement cost of raw materials may be the best available measure
of their net realizable value.
33 A reassessment of net realizable value shall be made in each subsequent period. When the circumstances
that previously caused the inventory write-down no longer exist, or when there is clear evidence of an
increase in net realizable value as a result of changed economic circumstances, the amount of the write-
down is reversed so that the new carrying amount is the lower of cost and the revised net realizable value.
This will occur, for example, when an item in stock that is carried at net realizable value because its selling
price has decreased is still in inventory of a subsequent period and its selling price has increased.

Recognition as an expense
34 When inventories are sold, the carrying amount of the inventories is recognized as an expense in the
period in which the related operating income is recognized. The amount of any write-down to net
realizable value, as well as all other losses on inventories, is recognized in the period in which the
write-down or loss occurs. The amount of any reversal of the write-down resulting from an increase
in net realizable value is recognized as a reduction in the value of inventories that have been
recognized as an expense in the period in which the recovery in value occurs.
35 Some inventories may be incorporated into other asset accounts, for example inventories that are used as a
component of self-constructed property, plant and equipment. Inventories allocated to other assets in this
manner will be recognized as an expense over the useful lives of the assets.

Information to be disclosed
36 The following information shall be disclosed in the financial statements:
(a) the accounting policies adopted for the measurement of inventories, including the cost
formula used;
(b) the total carrying amount of inventories, and the partial amounts according to the
appropriate classification for the entity;
(c) the carrying amount of inventories carried at fair value less costs to sell;
(d) the amount of inventories recognized as an expense during the period;
(e) the amount of inventory write-downs recognized as an expense in the period, in accordance
with paragraph 34;
(f) the amount of reversals of previous write-downs, which has been recognized as a reduction
in the amount of inventory expense in the period, in accordance with paragraph 34;
(g) the circumstances or events that have produced the reversal of the write-downs, in
accordance with paragraph 34 above; and
(h) the carrying amount of inventories pledged as collateral for the repayment of debts.
37 Information about the carrying amounts of the different classes of inventories, as well as the change in such
amounts during the period, will be useful to users of the financial statements. A common classification of
inventories is that which distinguishes between merchandise, production supplies, raw materials, work in
process and finished goods.
38 The amount of inventories recognized as an expense during the period, generally referred to as cost of
sales, comprises the costs previously included in the measurement of products that have been sold, as well
as undistributed indirect costs and production costs of inventories for abnormal amounts. The particular
circumstances of each entity may require the inclusion of other costs, such as distribution costs.

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39 Some entities adopt a format for the presentation of profit or loss for the period in which they present
amounts other than the cost of inventories that have been recognized as an expense during the period.
Under this format, an entity presents an analysis of expenses using a classification based on the nature of
these expenses. In this case, the entity shall disclose the costs recognized as raw materials and consumables
expenses, labor costs and other costs, together with the amount of the net change in inventories for the
period.

Effective date
40 An entity shall apply this Standard for annual periods beginning on or after January 1, 2005. Earlier
application is encouraged. If an entity applies this Standard for a period beginning before January 1, 2005,
it shall disclose that fact.
40A [Deleted] 40A [Deleted] 40A [Deleted] 40A [Deleted] 40A [Deleted
40B [Deleted] 40B [Deleted] 40B [Deleted] 40B [Deleted] 40B [Deleted
40C IFRS 13, issued in May 2011, amended the definition of fair value in paragraph 6 and amended paragraph 7. An
entity shall apply those amendments when it applies IFRS 13.
40D [Deleted]
40IFRS 15 Revenue from Contracts with Customers, issued in May 2014, amended paragraphs 2, 8, 29 and
37 and deleted paragraph 19. An entity shall apply those amendments when it applies IFRS 15.
40F IFRS 9, issued in July 2014, amended paragraph 2 and deleted paragraphs 40A, 40B and 40D. An entity shall
apply those amendments when it applies IFRS 9.
40G IFRS 16 Leases, issued in January 2016, amended paragraph 12. An entity shall apply that amendment when it
applies IFRS 16.

Repeal of other pronouncements

41 This Standard supersedes IAS 2 Inventories (revised in 1993).
42 The Standard also replaces SIC-1 Uniformity-Different Formulas for Inventory Costing.

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