IAS 2

(Inventories)
 Overview
 Objective and Scope
 Definitions

 Measurement of Inventories

 Cost of Inventories

 Cost Formula

 Net Realizable Value

 Recognition of an Expense

 Disclosure
Introduction
 International Accounting Standard 2
Inventories(IAS2) replaces IAS2 Inventories
(revised in 1993) and
 It should be applied for annual periods

beginning on or after 1January 2005.

 It was revised in 2003 with the main objective

or reducing the alternatives for the

measurement of inventories.
Objective and Scope
 To prescribe the accounting treatment for
inventories
 To provides guidance on the determination of

cost and its subsequent recognition as an

expense, including any write-down to net
realizable value.
 To provide guidance on cost formulas to assign

cost to inventories
Total Exclusions
IAS 2 applies to all inventories, except the
following:
 Work in progress arising under construction

contracts, (IAS 11 Construction Contracts)

 Financial instruments (IAS 39 Financial

Instruments)
 Biological assets related to agricultural

activity and agricultural produce at the

point of harvest (IAS 41 Agriculture).
Definition
 Inventories are assets:
 (a) held for sale in the ordinary course of business

 (b) In the process of production for such sale; or

 (c) in the form of materials or supplies to be

consumed in the production process or in the

rendering of services.
Inventories can include :
Goods purchased and held for resale
Finished Goods
Work in process being produces
Raw materials
Definition (Continued….)
 Net Realisable Value (NRV) is the estimated
selling price in the ordinary course of
business less estimated costs of completion
and the estimated costs necessary to make
the sale
 Fair Value (FV) is the amount for which an

asset could be exchanged, or a liability

settled, between knowledgeable , willing
parties in an arm’s length transaction.
Measurement
 Inventories shall be measured at the lower of
cost and the net realisable value
Cost of Inventories
The cost of inventories shall comprise all :
 costs of purchase,
 costs of conversion and
 other costs incurred in bringing the inventories

to their present location and condition.

Cost of Inventories (Continued)
costs of purchase includes:-
 purchase price
 Import duties and other taxes (other than those

subsequently recoverable by the entity from the

taxing authorities), and
 transport, handling and other costs directly

attributable to the acquisition of finished goods,

materials and services less Trade discounts,
rebates and other similar amounts
Cost of Inventories (Continued)
Cost of Conversion
The costs of conversion consists of :
 costs directly related to the units of production,

such as:-direct martials and direct labour.

 Fixed and variable production overheads that are

incurred in converting materials into finished

goods allocated on the basis of normal
production capacity .
 In case of Joint Products: Costs are allocated

between the products on a rational & consistent

basis.
Cost of Inventories (Continued)
other costs
 other costs incurred in bringing the inventories

to their present location and condition and

condition
 For Example:- Costs of non production

overheads or the cost of designing products for

specific customers can be included in the cost of
inventories
Excluded costs
IAS 2 lists two types of costs that excluded from the
cost of inventories and recognized as an expenses in
the period in which they are incurred
 Abnormal amounts of wasted materials, labour or

other production costs;

 Storage costs, unless those costs are necessary in

the production process before a further production

stage;
 Administrative overheads that do not contribute to

bringing inventories to their present location and

condition; and
 Selling costs.
Service Provider’s Inventory
 Measured at cost of production
 Production cost consist of

 Labour and other personnel costs

 Attributable Overheads
 Excluding Selling and admin expenses
 Profit Margin and non attributable overheads are

excluded
Cost Measurement-Techniques
 Standard costs: Standard costs take into account
normal levels of materials and supplies, labour,
efficiency and capacity utilisation. They are
regularly reviewed and, revised in the light of
current conditions

 Retail method: The retail method is often used in

the retail industry for measuring inventories of
large numbers of rapidly changing items with
similar margins for which it is impracticable to
use other costing methods
An Example of Retail method
A retailer identifies inventories at the end of an accounting period as
follows :
 Department A: Inventory with a selling price of Tk. 20,000. This

department makes a 20% gross profit on its sale

 Department B: Inventory with a selling price of Tk. 25,000.This

department sets its selling price at cost plus 30%

Requirement : Calculate the value of inventory of each department
Solution:
Department A: selling price of Tk. 20,000 less gross profit 20%,
So the value of inventory : Tk. ((20,000-(20,000*.20))=tk. 16,000
Department B: If selling price is cost plus 30%, then selling price must
be 130% of cost and the gross profit must be 30/130=23.08%
So the value of inventory :Tk.((25,000-(25000*0.2308))=Tk. 19,230
Cost Formulae
 Specific Identification: that specific costs are attributed to
identified items of inventory. This is the appropriate
treatment for items that are segregated for a specific
project, regardless of whether they have been bought or
produced.
 FIFO or Weighted Average :
◦ The cost of inventories, in other shall be assigned by
using the first-in, first-out (FIFO) or weighted average
cost formula.
◦ An entity shall use the same cost formula for all
inventories having a similar nature and use to the entity.
◦ But if not in similar nature it may use different cost
formulae.
Net realizable value
 NRV=Estimated selling price less cost to sell
 General Rule=Assets should not be carried at amounts
greater than those to be realised from their sale or use.
This applies to inventory where NRV falls below cost.
 Reasons for NRV becomes lower than the cost :
 An increase in cost or fall in selling price
 A physical deterioration in the condition of inventory
 Damage/obsolescence of product
 A strategic decision to manufacture or sell a product at
a loss
 Errors in production or purchasing
Recognition as an Expense
 When inventories are sold, the carrying amount
of those inventories shall be recognised as an
expense in the period in which the related
revenue is recognised.
 The amount of any write-down of inventories to
net realisable value and all losses of inventories
shall be recognised as an expense in the period
the write-down or loss occurs.
Disclosure
 The financial statements shall disclose:
 (a) the accounting policies adopted in measuring inventories, including the cost

formula used;
 (b) the total carrying amount of inventories
 (c) the carrying amount of inventories carried at fair value less costs to sell;
 (d) the amount of inventories recognised as an expense during the period;
 (e) the amount of any write-down of inventories recognised as an expense in

the period
 (f) the amount of any reversal of any write-down that is recognised as a

reduction in the amount of inventories recognised as expense in the period

 (g) the circumstances or events that led to the reversal of a write-down of

inventories and
 (h) the carrying amount of inventories pledged as security for liabilities.

The financial statement must also disclosed one of two things:

 The cost of inventory recognised as an expense during the period
 The operating cost applicable to revenue , recognised as an expense during the

period classified by their nature.