IAS 2 : Inventories – summary (2024)
IAS 2 provides guidance for determining of cost of inventories and the subsequent recognition of the cost as an expense including any write-down to net realizable value.
IAS 2 Applies to all inventories except:
work in progress on construction and service contracts (this is treated as per IAS 11);
financial instruments (these are treated as per IAS 32 and IFRS 9); and
biological assets arising from agricultural activity (this is treated as per IAS 41).
In December 1993: IAS 2 Inventories, which had originally been issued by the International Accounting Standards Committee.
In April 2001 the International Accounting Standards Board (Board) adopted IAS 2 Inventories.
In December 2003 the Board issued a revised IAS 2 as part of its initial agenda of technical projects.
IAS 2 defines inventories as assets which are:
• held for sale in the ordinary course of business, such as Merchandise.
• in the process of production for such sales, such as Production Supplies.
• in the form of materials or supplies to be consumed in the production- such as Work in Process or rendering of services - such as Finish Goods.
Inventories should be measured at lower cost and net realizable value.
• there are only two exceptions or two types of inventories to which this rule does not apply.
• number one: producers of agricultural or forest products mineral and mineral products and they measure inventories at net realizable value.
• and Other is commodity dealers and brokers who measure their inventories at fair value less cost to sell.
Cost should include:
• 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.
IAS 2 permits certain measurement techniques - the first one is the standard cost, this method is mostly used by the producers of large amounts of small items.
the second measurement technique permitted by IAS 2 is a retail method and it is often used by retailers who have a large turnover of inventories with similar profit margins.
In Other Cases, we can use either first in first out - FIFO method or weighted average method. The LIFO method is no longer allowed in IAS 2. last in the first out it is permitted a US GAAP but not in IFRS.
we should use the same cost formula for all inventories with similar nature and use it for the entity.
now let's take a look at net realizable value. it is estimated selling price in the ordinary of the business less estimated cost of completion less estimated costs necessary to make a sale.
So if the net realizable value is lower than the cost then we need to write down our inventories to their net realizable value.
IAS 2 also prescribes when and how to recognize the inventories in the profit or loss as an expense.
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⏱️TIMESTAMPS
00:06 - Video Intro
00:19 - Introduction
01:10 - Objectives & Scope
01:41 - History
02:38 - What is Inventories?
07:07 - How to Measure Inventories
08:47 - Business Case Study
09:27 - Wrap up
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