Scope of IAS 2 Inventories
IAS 2 applies to all inventories except:
- Financial instruments (IFRS 9/IAS 39)
- Biological assets (IAS 41)
Does not apply to measurement of inventories held by:
- Producers of agricultural and forest products measured at NRV.
- Minerals and mineral products measured at NRV.
- Commodity brokers who measure inventory at fair value less costs to sell.
Inventories are assets:
- Held for sale in ordinary course of business.
- 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.
Inventories are measured at the lower of cost and net realisable value (NRV)
- Any costs of purchase, including non-recoverable taxes, transport and handling.
- Costs are net of trade volume rebates.
- Costs of conversion.
- Other costs to bring inventory into its present condition and location.
- Abnormal waste.
- Storage costs.
- Admin overheads not related to production.
- Selling costs.
- Interest cost (where settlement is deferred). - IAS 23 identifies RARE circumstances where borrowing costs can be included.
- For non-interchangeable items
– SPECIFIC IDENTIFICATION.
- For inter changeable items
– FIFO, or
– WEIGHTED AVERAGE COST.
- Use of LIFO is prohibited.
Cost Measurement Techniques:
Standard Cost Method
- Takes into account normal levels of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revised in the light of current conditions.
- 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. The cost of the inventory is determined by reducing the sales value of the inventory by the appropriate percentage gross margin.
Net Realisable Value
NRV is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated selling costs
Recognition of Expenses
- Carrying amount of inventories sold during the period – COGS.
- Write down to NRV or Obsolescence as expense in the period.
- Write down reversal set off against this expense.
- Accounting policies for measuring inventories, including the cost formula
- The total carrying amount of inventories, and the carrying amount in classifications appropriate to the entity (eg. raw materials, WIP, finished goods)
- Carrying amounts of inventories carried at FV less costs to sell
- Amounts of inventories recognised as an expense during the period
- Amount of any write-down of inventories recognised as an expense in the period
- Amount of any reversal of a write-down to NRV, and the circumstances that led to such a reversal