IAS 02 Inventories

IAS generally applies to all inventory. However, there are some exceptions when :
 WIP arising under construction contract, including directly related service contract – covered in IAS 11 Construction Contract
 Financial instrument – covered in IAS 32 Financial Instrument : Disclosure and Presentation and IAS 39 Financial Instrument : Recognition and Measurement
 Inventories of agricultural and forest product, mineral ores and agricultural produce to the extent that they are measured at net realizable value in accordance with well established practices in certain industries
 Biological assets related to agricultural activity – covered in IAS 41 agriculture
 Commodity broker-traders who measure their inventories at fair value less cost to sell

Definition of Inventory
 Assets held for sale in the ordinary course of business, in the process of production for sale, and in the form of materials or supplies to be consumed in the production process in the rendering of services
 Main form :
 Raw materials
 Work in progress
 Finished goods
Measurement of inventory
 Cost capitalized as inventory includes all cost incurred directly or indirectly that were necessary to bring inventory to its present condition and location, such as :
 costs of purchase – if there are rebates or discount, these should be deducted
 costs of conversion – directly related to the units of production : Fixed cost & Variable Cost
 other costs – capitalized if they meet the conditions to bring inventoy to its present location and condition, Ex. Cost of transporting inventory from the factory to its retail location.
 In limited circumstances, interest cost may be included in the measurement of such inventories under IAS 23 Borrowing Cost. Example : interest cost may be included in maturing inventory, such as whisky. The production period is attributable to bringing the product to its existing condition, and so the addition of interest is permissible under IAS 23.
 Techniques
 Standard cost method – considers normal levels of materials and supplies, labour, efficiency and capacity utilization
 Retail cost method – used in retail industry to measure rapidly changing high-volume inventories with similar margins. Cost is determined by reducing the sales value of the inventory by appropriate percentage gross margin
 Formula
 Specific identification – used for unique inventory, such as jewellery
 Weighted average
 FIFO

Net Realisable Value (NRV)
 IAS 2 states that inventory should be measured at the lower of cost and NRV.
 IAS 2 defined NRV as the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated cost necessary to make the sale.
 Assessing NRV :
 Unrecoverable – Example : due to damage or obsolence, a write-down of the inventory to NRV is recognized as an expense.
 Reversals – if the circumstances that caused the write-down no longer exits of if there has been a positive changes in circumstances, the previous write-down is reversed. The new carrying value is the lower of the cost and the revised NRV.
 Selling above and below cost – if a specif component of inventory is selling below cost, it may not be necessary to write it down if the finished product in which they will be incorporated is expected to sell at or above its cost.