IAS -2 serves to define the proper accounting procedures for managing inventories. It offers comprehensive guidance on evaluating inventory costs and recognizing associated expenses, including write-downs to reflect net realizable value.
Scope of Inventories
Inclusions: Inventories comprise finished goods for sale, work in process, and raw materials and supplies consumed in production.
Exclusions: Excludes inventories from construction contracts, financial instruments, and certain agricultural assets.
Inventory Valuation Principle
Core Principle: Inventories are valued at the lower of cost and net realizable value (NRV).
Measurement of Inventory Costs
Cost Components: Inventory cost encompasses purchase costs, conversion costs, and other expenses related to the present state and location of inventories.
Exceptions: Excludes abnormal waste, storage costs, unrelated overheads, selling costs, foreign exchange variations, and certain interest costs.
Methods for Inventory Measurement
Cost Formulas: The standard cost and retail methods are acceptable if they approximate the actual cost.
Non-Interchangeable Items: Precise costs attributed to individual items.
Interchangeable Items: FIFO or weighted average cost formulas allowed; LIFO not permitted after 2003.
Write-Downs to Net Realizable Value (NRV)
Definition: NRV is the expected selling price minus completion and sale-related costs.
Recognition: Write-downs to NRV recorded as expenses when they occur; reversals recognized in the income statement during the reversal period.
Expense Recognition
IAS 18: Revenue recognition for sold goods is governed by IAS 18 Revenue.
Expense Recognition: Carrying the amount of sold inventories is recognized as expenses (cost of goods sold); write-downs and inventory losses are also recognized as expenses.
Disclosure Requirements
Mandatory Disclosures: Include accounting policy, carrying amounts categorized by type, inventory write-downs and reversals, inventory pledged as security, and costs recognized as expenses.
Alternative Presentation: Entities can disclose operating costs by nature and net change in inventories, aligning with IAS 1 Presentation of Financial Statements.
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