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INVENTORIES (lAS 2)
1.
BACKGROUND AND INTRODUCTION
The Standard prescribes the accounting treatment for inventories . The main issue with respect to
accounting for inventory is the amount of cost to be recognized as an asset. In addition, the
Standard provides guidance on the determination of the cost and subsequent recognition of expense
(including write-down of inventory to its net realizable value). The Standard also provides
guidance on the cost flow assumptions ("cost formula s") that are to be used in assigning cost s to
inventories.
2. SCOPE
2.1 This Standard applies to all inventories other than
• Work in progress under construction contracts and directly related service contracts (lAS 11,
Construction Contracts)
• Financial instruments
• Biological assets related to agricultural activity and agricultural produce at the point of
harvest (under lAS 41,
Agriculture)
2.2 This Standard does
not
apply to the
measurement
of inventories held by
• Producers of agriculture and forest products , agricultural produc e after harvest, and minerals
and mineral s product s, to the extent that they are measured at net realizable value in
accordance with best practices within those industries .
When such inventories are measured
at net realizable value, changes in that value are recognized in the profit or loss in the period
of change.
• Commodity brokers-trad ers who measure their inventories at fair value less cost to sell.
When such inventories are measured
at
fair value less cost to sell, the changes in fai r value
less costs to sell are recognized as profit or loss in the period of change.
Practical Insight
Although inventories referred to in Section
2.1
above are excluded from
all
requirements of
this Standard, the inventories referred to Section
2.2
above are excluded
only
from
measurement requirements
of this Standard (lAS 2). In other words , all requirements of this
Standard, except the requirements relating to "measurement," apply to inventories mentioned
in Section 2.2 above. Therefore, the principles of measurement of inventories under lAS 2
(i.e., lower of cost or net realizable value) do not apply to inventories ment ioned in Section
2.2
above .
3. DEFINITIONS OF KEY TERMS
Inventory. An asset
(a) Held for sale in the normal course of business;
(b) In the process of production for such sale; or
(c) In the form of materials or supplies to be used
In
the production process or in
rendering of services .
Net realizable value. The estimated selling price in the normal course of business less
estimated cost to complete and estimated cost to make a sale.
Fair value. The amount at which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm's-length transaction .