IAS 2: INVENTORIES
Notes and Quizzers: Theories of Accounts (IFRS Based)
EXCEPTION TO MEASUREMENT
REQUIREMENTS
Measurement requirements of IAS 2 do
not apply to inventories held by
● Producers of Agricultural and Forest
Products, Agricultural Produce after
harvest to the extent that they are
measured at net realizable value
● Commodity broker-traders who
measure their inventories at fair value
less costs to sell
INVENTORIES DEFINED
are initially recognized at cost
Goods held for sale in the ordinary course of
business
Goods in the process of production for such sale
In the form of materials or supplies to be
consumed in the production process or in the
rendering of services
In the case of service providers, the cost of service
for which the entity has not yet recognized the
related revenue
COMPONENTS OF COST
COST OF PURCHASE
● Purchase price, net of trade discounts,
rebates and other similar items
● Import duties and other taxes
● Transport, handling and other costs
directly attributable to acquisition
COST OF CONVERSION
● Direct labor
● Variable production overheads
● Fixed production overheads
● The allocation of fixed overhead to units of
production is based on normal capacity
- Unallocated overheads due to
operation below normal capacity
are charged as expenses
- In periods of high production,
fixed overhead per unit is
decreased (fixed overhead/actual
units)
OTHER COSTS
● Included only to the extent that they
are incurred in bringing the inventories
to their present location and condition
● Examples are costs of designing
products for specific customers
Empleo, 2016
COSTS EXCLUDED FROM INVENTORIES
● Abnormal amounts of wasted
materials, labor or production cost
● Storage costs, unless necessary in the
production process before a further
production stage
● Administrative overheads, that do not
contribute to their present location
and condition
● Selling cost
AGRICULTURAL PRODUCE harvested from
biological assets are measured at initial
recognition at fair value less estimated costs
to sell at the point of harvest
MEASUREMENT SUBSEQUENT TO INITIAL
RECOGNITION Inventories are measured at
the lower of cost and net realizable value
COST FORMULAS
NOT ORDINARILY INTERCHANGEABLE and
goods segregated for specific projects
- Specific identification method
ORDINARILY INTERCHANGEABLE
- First-in, First-out (FIFO) method
- Weighted average method
USE OF COST FORMULAS
● An entity shall use the same cost
formula for all inventories having a
similar nature and use to the entity
● For inventories with a different nature
or use, different cost formula may be
justified
TECHNIQUES FOR MEASUREMENT OF COST
STANDARD COST METHOD takes into
account normal levels of materials and supplies,
labor, efficiency and capacity utilization
RETAIL METHOD the cost to retail percentage
takes into consideration inventory that has been
marked down to below its original selling price. An
average percentage for each retail department is
often used
NET REALIZABLE VALUE (NRV) is the
estimated selling price in the ordinary course
of business less the estimated costs of
completion and the estimated costs of
disposal
BASES FOR DETERMINING SELLING PRICE TO
DISCLOSURE REQUIREMENTS
COMPUTE NET REALIZABLE VALUE (NRV)
For inventories Accounting policies adopted in measuring
covered by sales of The sales price is the inventories, including the cost formula used
contracts, the sales general selling price of
price is the contract the items Total carrying amounts and the carrying amount
price in the classification appropriate to the entity

Amount of inventoried recognized as an

INVENTORIES are usually written down to expense during the period
net realizable value on an item-by-item basis.
In some circumstances, it may be appropriate Amount of any write-down recognized as an
to group similar or related items expense

Amount of reversal of any write-down

RECOGNITION AS EXPENSE
Circumstances that led to the reversal of a
When inventories are sold, the carrying amount
write-down
is recognized as an expense in the period of
revenue recognition
Carrying amount of inventories pledged as
security for liabilities
The write-down or/and losses are recognized as an
expense in the period the write-down or loss
occurs

The reversal of write-down is recognized as

reduction in the amount of inventories
recognized as an expense in which the reversal
occurs

RECOGNITION OF EXPENSE FOR GOODS

SOLD

Under the function of expense method, the

expense is the cost of goods sold

Under the nature of expense method, the expense

on the income statement is the net cost of
purchases adjusted by the increase or decrease in
inventory

WRITE DOWN TO LOWER OF COST AND NET

REALIZABLE VALUE
The decline in net realizable value of
inventory is recognized either

As part of cost of goods sold (only under the

function of expense method)

As other operating losses/expenses in the income

statement(under either the function of expense
method or the nature of expense method)

REVERSAL OF WRITE-DOWN for the same

inventory is limited to the amount of original
write-down, so that the new carrying amount
is the lower of cost and the revised net
realizable value