This document provides an overview of IAS 2 on inventories. The objectives of IAS 2 are to prescribe the accounting treatment for inventories and determine the amount of cost to be recognized as an asset. Inventories are assets held for sale, in production, or in the form of materials used in production. Inventories must be measured at the lower of cost or net realizable value. Cost includes all purchase, conversion and other costs to bring inventories to their present condition. Inventories are recognized as an expense when sold. Financial statement disclosures on inventories are also required.

1. IAS 2
Inventories
By:- Yohannes Negatu
(ACCA,DipIFR,Cert IPSAS,Cert BV)

2. Overview
OBJECTIVE
SCOPE
DEFINITIONS
MEASUREMENT OF INVENTORIES
Cost of inventories
Cost formulas
Net realizable value
RECOGNITION AS AN EXPENSE
DISCLOSURE

3. Objectives:-
To prescribe the accounting treatment for
inventories.
 To determine the amount of cost to be
recognized as an asset.

4. Scope
The Standard applies to all inventories, except:
IFRS 9 & IAS 41

5. 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.

6. Measurement
Inventories shall be measured at the lower of cost and
net realizable value.

7. 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.

8. continued---
Costs of purchase includes:-
• purchase price
• Import duties and other taxes
• Transport, handling
• Other costs less:- Trade discounts & rebates

9. continued
Costs of conversion includes:-
• Direct labor
• Production overheads

10. continued
Examples of costs excluded from the cost of
inventories and recognized as expenses in the period
in which they are incurred are:
(a) abnormal amounts of wasted materials, labor or
other production costs;
(b) storage costs, unless those costs are necessary in
the production process before a further production
stage;

11. continued
(c) administrative overheads that do not contribute to
bringing inventories to their present location and
condition; and
(d) selling costs.

12. Cost formulas
 Specific Identification
 FIFO
 Weighted Average
N.B:- Use the same cost formula for all inventories
having a similar nature and use to the entity.

13. Net realizable value
NRV = Estimated S.P less costs to sell
General Rule:- assets should not be carried in excess
its recoverable amount.
Reasons for NRV becomes lower than the cost:-
1. Damage/ obsolescence
2. Falling in selling price
3. Increase in cost of completion

14. Recognition as an expense
When inventories are sold, the carrying amount of
those inventories shall be recognized as an expense in
the period in which the related revenue is recognized.
The amount of any write-down of inventories to net
realizable value and all losses of inventories shall be
recognized as an expense in the period the write
down or loss occurs.

15. 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;

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(d) the amount of inventories recognized as an
expense during the period;
(e) the amount of any write-down of inventories
recognized as an expense in the period

17. Thank You

18. Questions and Discussion