Chapter 1: Introduction

Objective

The objective of IAS 2 is to prescribe the accounting treatment for inventories. The standard notes that a primary issue in accounting for inventories is the cost to be recognized as an asset until the related revenues are recognized. The standard guides the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value. Further to this, it guides the cost formulas that are used to assign costs to inventories.

Overview of IAS 2

The accounting treatment for most types of inventories is prescribed in IAS 2 Inventories, which provides guidance for determining the cost of inventories and for subsequently recognizing an expense, including any write-down to net realizable value. It also outlines acceptable methods of determining cost, including specific identification (in some cases), first-in first-out (FIFO), and weighted average cost.

Scope

This Standard applies to all inventories, except:

1. Work in progress arising under construction contracts, including directly related service contracts (see IAS 11 Construction Contracts);
2. Financial instruments (see IAS 32 Financial Instruments: Presentation and IFRS 9 Financial Instruments); and
3. Biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41 Agriculture);

This Standard does not apply to the measurement of inventories held by:

• producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realizable value by well-established practices in those industries. When such inventories are measured at net realizable value, changes in that value are recognized in profit or loss in the period of the change.
• Commodity broker-traders who measure their inventories at fair value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognized in profit or loss in the period of the change.

Definitions

The following terms are used in this Standard with the meanings specified:

Inventories are assets:

1. held for sale in the ordinary course of business;
2. In the process of production for such sale; or
3. in the form of materials or supplies to be consumed in the production process or the rendering of services.

Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs 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.

Net realizable value refers to the net amount that an entity expects to realize from the sale of inventory in the ordinary course of business. Fair value reflects the price at which an orderly transaction to sell the same inventory in the principal (or most advantageous) market for that inventory would take place between market participants at the measurement date.

The former is an entity-specific value; the latter is not.

Net realizable value for inventories may not equal fair value less costs to sell.

Inventories encompass goods purchased and held for resale including, for example, merchandise purchased by a retailer and held for resale, or land and other property held for resale. Inventories also encompass finished goods produced, or work in progress being produced, by the entity and include materials and supplies awaiting use in the production process.

Costs incurred to fulfill a contract with a customer that does not give rise to inventories (or assets within the scope of another Standard) are accounted for by IFRS 15 Revenue from Contracts with Customers.

IAS 2 is required to be applied when accounting for inventories (other than those specifically excluded), which the Standard defines as assets:

• held for sale in the ordinary course of business;
• in the process of production for such sale; or
• in the form of materials or supplies to be consumed in the production process or the rendering of services.

Inventories encompass:

• goods purchased and held for resale (e.g., merchandise purchased by a retailer and held for resale, or land and other property held for resale);
• finished goods produced, or work in progress being produced, by the entity; and
• materials and supplies awaiting use in the production process.