The standard provides guidance on accounting for inventories. It defines inventories as assets held for sale, in production for sale, or materials used in production. Inventories must be measured at the lower of cost and net realizable value, with cost determined using purchase cost, conversion cost, or formulas like FIFO or weighted average. If net realizable value falls below cost, inventories must be written down with the loss recognized in profit or loss. Entities must disclose information about inventory accounting policies, measurements, and write-downs.

1. INVENTORIES
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2.  Prescribe accounting treatment for
inventories
 Identify cost to be recognised and carried
forward until related revenues are
recognised
 Conditions for write-down to net realisable
value
 Guidance on cost formulas
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3. The standard excludes the following inventories:

Work in progress under construction contracts

Financial instruments

Biological assets related to agricultural activity and

agricultural produce at the point of harvest
Inventories held by producers of agricultural and

forest products and minerals measured at NRV are
excluded from measurement requirements of IAS 2
(e.g. where sale secured under forward contract)
Inventories held by commodity broker-traders who

measure inventories at fair value less costs to sell are
excluded from measurement requirements of IAS 2 as
they are held to profit from fluctuations in price
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4. Inventories: Assets

Held for sale

 In the process of production for sale
 Materials and supplies to be consumed in production or rendering of
services
 For which the related revenue has not yet been recognised
Net realisable value (NRV): estimated selling price in the ordinary

course of business less estimated costs of completion and costs
necessary to make the sale
Net amount expected to be realised from sale in ordinary course of

business
 Affected by the entity’s own circumstances such as distance to deliver
the product to market
Fair value (FV): amount for which the assets could be exchanged

or liability settled between knowledgeable, willing parties in an
arm’s length transaction
Net amount expected to be realised in the market place

 Not an entity specific value (determined by forces of supply and
demand)
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5. Measured at lower of cost and NRV

Purchase costs

Conversion costs

Costs to bring inventories to present location and

condition
Inventory costs of service providers such as labour:

Measured at costs of production

Costs of labour directly engaged in providing the service

Attributable overheads and supervisory personnel

Exclude sales and administrative labour, profit and non-

attributable overheads
Costs of Agricultural produce per IAS 41

Produce harvested from biological assets are measured

at fair value less estimated point-of-sale costs at the
point of harvest
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6. Purchase cost are:

costs directly attributable to acquisition of finished

goods, materials and services
net of trade discounts, rebates and other similar items

 Purchase price
 Import duties
 Irrecoverable taxes
 Transport
 Handling
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7. Costs directly related to units of production

direct labour

Systematic allocation of fixed and variable production overheads (FPO & VPO)to

convert materials into finished goods – indirect costs of production
If more than one product cannot be separately identified, allocate on rational and

consistent basis e.g. sales value of finished goods
Deduct NRV of immaterial by-products that are sold from cost of main product

VPO vary with volume of production

Indirect materials and labour

Allocate to each unit of production on basis of actual use

FPO remain constant regardless of volume of production e.g.

Maintenance and depreciation of factory buildings & equipment

Management and administration of factory

For normal capacity expected on average over a number of periods allowing for

planned maintenance – actual production over a number of periods can be used as an
estimate
Allocated to each unit of production

In periods of low production the allocation per unit is not increased but recognised as

expense if unallocated
Decrease allocation per unit in periods of high production so that inventory is not

measured above cost
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8. E.G. designs for specific customers or non-

production overheads
 Certain borrowing costs can be included per IAS
23
 Deferred settlement costs are expensed as
interest over period of financing
 The following must be expensed and not
included in inventory:
Abnormal and wasted materials, labour or production

costs
 Storage costs unless necessary for conversion process
 Administrative costs not related to bringing inventory
to a specific location and condition for sale
 Selling costs
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9.  Can be used to approximate cost for
convenience, but last-in first-out formula is
prohibited
 Standard costs are normal costs that are
regularly reviewed and revised to keep them
current
 Retail method used for large volume of
turnover of items with similar margins
Reduce sales value by average percentage gross

margin taking into account marked down items
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10. Attribute specific individual costs to separately

identifiable items of inventory:
 Items not ordinarily interchangeable
 Goods and services produced and segregated for
specific projects
Use a first-in, first-out (FIFO) or weighted average cost

formula for large numbers of items that are ordinarily
interchangeable
These methods could be used to obtain a predetermined

effect on profit or loss
Use the same formulae for inventories with similar nature

or use even if in different geographical location or tax
regime
FIFO assumes items bought first are sold first and uses most

recent prices
Weighted average takes the average of cost at beginning of

period and during the period
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11. Write down to NRV if below cost due to:

Damage

Declining selling prices

Increased costs to complete or sell

Write down by item, product line or service, not by class

of inventory
Use most reliable estimates using prices directly after the

end of the reporting period to confirm circumstances at
the period end
Use contracted price and if not available, general selling

prices
Provisions for sale or purchase contracts are recognised

and measured per IAS37
Only write down materials if NRV of finished product < cost

– replacement cost of materials
Assess NRV at each period end and reverse write down if

NRV > cost (reversal limited to original write down)
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12.  Recognise inventories as expense in period
when related revenue is recognised
 Recognise loss or write-down in period it
occurs
 Reduce expense by any write downs
recognised in previous periods and those
reversed in the current period
 Inventories allocated to other assets (e.g.
property, plant or equipment) are expensed
over the useful life of the asset
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13.  The financial statements shall disclose:
Accounting policies in measuring inventories and

formulas used
Total carrying amount of inventories and by class

Amount carried at fair value less costs to sell

Amount recognised as expense during the period

Amount of write-down recognised as expense in

the period
Amount of any reversal of any write-down that is

recognised as reduction of expensed inventories
Circumstances that led to reversal of write-down

Carrying amount of inventories pledged as

security for liabilities
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14. Inventories are assets held for sale for which related

revenues have not yet been recognised
Measure at lower of cost and net realisable value

recognise initially at cost and write down to NRV if

circumstances after period end confirm that NRV is lower than
cost and reverse write down when NRV rises above cost
Include costs to bring inventories to location and condition

for sale including purchase or conversion costs
Use purchase costs or formulas (FIFO or Weighted Average)

to determine amount to be recognised where large volume
of similar items are sold
Expense carrying value of stock when sale is recognised

and reduce the expense for any write-downs
Disclose accounting policies, classes of inventory and

accounting entries
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