This document summarizes the key principles of IAS 2 regarding the accounting treatment for inventories. It defines inventories as assets held for sale, in production, or as materials/supplies. Inventories must be measured at the lower of cost or net realizable value, where net realizable value is the estimated selling price less costs to complete and sell. Cost includes purchase costs, conversion costs, and other costs to bring inventories to their present condition and location. Certain costs like abnormal losses or selling costs are excluded.

1. Inventories
IAS – 2

2. Objective
The objective of this standard is to
prescribe the accounting treatment for
inventories.

3. Scope
IAS 2 excludes certain inventories:
• work in process arising under construction
contracts (see IAS 11 Construction Contracts)
• financial instruments (see IAS 39 Financial
Instruments: Recognition and Measurement)
• biological assets related to agricultural activity
and agricultural produce at the point of harvest
(see IAS 41 Agriculture).

4. Definitions
Inventories are assets:
• Held for sale in ordinary course of business
• In the process of production for such sales
• Material or supplies used in production
process or to render services
Net Realizable Value
It is the estimated selling price less the cost to
complete and sell

5. Measurement of inventory
• Inventory should be measured at lower of
cost or net realizable value

6. Realisable value
Realisable value is, of course, the price the
organisation receives for its inventory from the
market.
• However, getting this inventory to market may
involve
– additional expense and
– effort in repackaging,
– advertising, delivery and
– even repairing of damaged inventory.

7. Which Value you should
assign to inventory?
Item Cost (Rs) Net realisable value (Rs.)
1 No. 876 7,000 9,000
2 No. 997 12,000 12,500
3 No. 1822 8,000 4,000

8. Cost of inventories
Cost should include all:
• costs of purchase (including taxes,
transport, and handling) net of trade
discounts received
• costs of conversion (including fixed and
variable manufacturing overheads) and
• other costs incurred in bringing the
inventories to their present location and
condition

9. Costs not to be included in the
inventory cost
• Abnormal losses of material, labor etc
• Storage costs
• Administrative overheads that are not to bring
the inventories at present location or condition
• Selling costs
• Borrowing costs (with some exceptions)
• foreign exchange differences arising directly on
the recent acquisition of inventories invoiced in
a foreign currency

10. Techniques of measurement of
cost
• Standard cost method
• Retail method

11. Cost Formulas
• Items which are not ordinarily
interchangeable should be valued at
individual cost basis
• FIFO and WAVC are benchmark
treatment
• LIFO is no longer allowed

12. Recognition as an expense
• The inventory cost should be recognized
as an expense in the period in which their
revenue is recognized

13. Disclosure
• Policy to measure inventories including cost formula
• Total carrying amount of inventory with classification
• Carrying amount of inventory carried at net
realizable value
• The amount of any reversal of any write-down of
inventory that is recognized as revenue in the period
• The circumstances and events that have caused
this reversal
• Carrying amount of inventories pledged as security
against a liability

14. Activity
1. Value the following items of inventory:
– Material costing $12,000 bought for processing and
assembly for a profitable special order. Since
buying these items, the cost price has fallen to $
10,000
– Equipment constructed for customer for an agreed
price of $ 18,000. This has recently been
completed at a cost of $ 16,800. It has now been
discovered that , in order to meet certain
regulations, conversion with an extra cost of $
4,200 will be required. The customer has accepted
partial responsibility and agreed to meet half the
extra cost.

15. Practise Question
• Q1. The cost of inventories held by
Bonus Ltd. is Rs. 350,000. The estimated
selling price of inventories is Rs.
300,000. The company pays Rs. 5%
commission on sales to manager.
• You are required to calculate the value at
which inventories should appear in the
Statement of Financial Position.