This is all about IAS 2 Inventories.

1. M M Rahman & Co.
Chartered Accountants
Level - 10, Padma Life Tower,
115 Kazi Nazrul Islam Avenue,
Bangla Motor, Dhaka - 1000.

2. IAS 2
Inventories

3. Introduction
• IAS 2 Inventories contains the requirements on how to account for most types
of inventory. The standard requires inventories to be measured at the lower of
cost and net realizable value (NRV).
• IAS 2 Inventories was first issued in December 1993 and subsequently revised
in 2003.
• It should be applied for annual periods beginning on or after 1 January 2005.
• IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine SIC-1
Consistency - Different Cost Formulas for Inventories.
Those standards was superseded by and incorporated into IAS 2 (Revised 2003).

4. Objectives
[IAS 2.1]
Prescribes the accounting treatment for inventories.
Provides guidance on the determination of cost and its
subsequent recognition as an expense, including any
write-down to net realizable value.
Gives guidance on the cost formulas that are used to
assign costs

5. Definitions
Inventories are assets
that are:
Held for sale
In the process of
production
Materials that will be used
in the production process
Inventories:

6. ABC Bicycle assembles and sales bicycles. The
cycle is made by assembling following parts:
• Bike frames, front fork, standard wheel assembly, gear assembly, and
dual pad seats
As on 30 June 2018, the inventories consisted of following:
•Assembled cycles, ready for sale- generally known as finished goods
•Partly assembled cycles- these were still in the production process; generally
known as working in progress
•Materials like bike frames, front fork, etc.- in the form of materials or supplies
to be consumed in the production process; generally known as raw materials
Therefore inventories includes
raw materials, work in
progress, and finished goods.

7. Therefore we have guidance on
measuring and valuing inventories
through IAS 2 Inventories!
Value of
inventory
directly
affects the
profitability of
the entity
Value of
inventory has
a direct
bearing on
assessment of
liquidity
Inventories
form a
significant
portion of FS
for

8. NRV and FV
Net realizable value (NRV) 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. [2.6]
Fair value (FV) 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 a
measurement date. [See IFRS 13]

9. Exclusions
 This Standard applies to all inventories, except:
a) [deleted] WIP arising under construction contracts, including directly
related service contracts (see IFRS 15 Revenue from contracts with
customers) [2.2(a)];
b) Financial instruments (see IAS 32 Financial Instruments: Presentation
and IFRS 9 Financial Instruments) [2.2(b)]; and
c) Biological assets related to agricultural activity and agricultural
produce at the point of harvest (see IAS 41 Agriculture). [2.2(c)]

10. Measurement
Lower of
Cost
Net realizable value

11. Measurement- continued
Cost should include
other costs
incurred in
bringing at
present
condition
Costs of
conversion
Costs of
purchase

12. Cost of Purchase
• It includes [2.11]:
1. Purchase price, import duties and other taxes (other than those
subsequently recoverable by the entity from the taxing authorities),
and
2. Transport, handling and other costs directly attributable to the
acquisition of finished goods, materials and services.
• Deductions:
 Trade discounts,
 Rebates and other similar items

13. Cost of conversion
It includes [ 2.12 – 14 ]
• Costs directly related to the units of production, such as direct labor.
• It also include a systematic allocation of fixed and variable production
overheads.
• The allocation of fixed production overheads to the costs of conversion is
based on the normal capacity of the production facilities
• Unallocated overheads are recognized as an expense in the period in which
they are incurred

14. Other costs
• Other costs are included in the cost of inventories only to the extent
that they are incurred in bringing the inventories to their present
location and condition [2.15]
• I.e.: Non-production overheads or the costs of designing products for
specific customers in the cost of inventories

15. Cost of Inventories
•Purchase price, import duties less refundable taxes, handling cost
•Direct cost to acquire goods (raw materials, finished goods.Cost of purchase
•Directly related to unit of production like direct labor cost,
•Allocation of fixed and variable overhead cost of production
•Variable production overhead- indirect cost of production that varies directly with volume
•Fixed production overhead- Indirect cost that do not vary directly with volume produced
Cost of conversion
•Consultancy charges, professional fees, etc.
Other costs: cost to
bring inventory to
present location
•Borrowing costs: can be included if IAS 23 requirements are fulfilledFinance cost

16. Excluded costs
• Abnormal amounts of wasted materials, labor or other production costs; [2.16(a)]
• Storage costs, unless those costs are necessary in the production process before a
further production stage; [2.16(b)]
• Administrative overheads that do not contribute to bringing inventories to their
present location and condition; and [2.16(c)]
• Selling costs. [2.16(d)]

17. Interest cost
• To a limited extent borrowing costs are included in the cost of inventories under
IAS 23 Borrowing Cost [2.17]
• In case of Deferred Payment (DP) purchase of inventories: [2.18]
• Difference between the purchase price for normal credit terms and the amount
paid, is recognized as interest expense over the period of the financing [2.18]

18. Cost measurement - Techniques
• For the measurement of the cost of inventories, the standard cost method or the
retail method, may be used for convenience if the results approximate cost. [2.21]
• The retail method is 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. [2.22]

19. Cost formulae
• For inventory items that are not interchangeable, specific costs are attributed to the
specific individual items of inventory.
• For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost
formulas. [IAS 2.25] The LIFO formula, which had been allowed prior to the 2003
revision of IAS 2, is no longer allowed.
• The same cost formula should be used for all inventories with similar characteristics as
to their nature and use to the entity. For groups of inventories that have different
characteristics, different cost formulas may be justified. [IAS 2.25]

20. Net Realizable Value (NRV)
• NRV is the estimated selling price in the ordinary course of business,
less the estimated cost of completion and the estimated costs
necessary to make the sale. [IAS 2.6]
• Any write-down to NRV should be recognized as an expense in the
period in which the write-down occurs. Any reversal should be
recognized in the income statement in the period in which the
reversal occurs. [IAS 2.34]

21. Reversal of NRV
• When the circumstances that previously caused inventories to be written down below
cost no longer exist or
• When there is clear evidence of an increase in net realizable value because of changed
economic circumstances, the amount of the write-down is reversed
• The reversal is limited to the amount of the original write-down so that the new
carrying amount is the lower of the cost and the revised net realizable value.
• I.e.: when an item of inventory that is carried at net realizable value, because its
selling price has declined, is still on hand in a subsequent period and its selling price
has increased it requires a reversal

22. Recognition of expense - continued
[2.34]
• 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

23. Recognition of expense
The amount of any reversal of any write-down of
inventories, arising from an increase in net
realizable value, shall be recognized as a reduction
in the amount of inventories recognized as an
expense in the period in which the reversal occurs.

24. Disclosures
• accounting policy for inventories [2.36(a)]
• carrying amount, generally classified as merchandise, supplies, materials, work in progress,
and finished goods. The classifications depend on what is appropriate for the entity [2.36(b)]
• carrying amount of any inventories carried at fair value less costs to sell [2.36(c)]
• amount of any write-down of inventories recognized as an expense in the period [2.36(d)]
• amount of any reversal of a write-down to NRV and the circumstances that led to such
reversal [2.36(g)]
• carrying amount of inventories pledged as security for liabilities [2.36(h)]

25. Thank you 