IAS 2 - Inventory

• Types of inventories


  • Held for sale in the ordinary course of business - Finished Goods or Goods purchased for resale
  • In the process of production for such sale - Work in progress
  • In the form of materials or supplies - Raw Material
• Measurement


  Inventories should be measured at the lower of cost and net realisable value (NRV)
• Cost


  Comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition
• Net Realisable Value (NRV)

  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
• In the case of incomplete items, NRV must take account of costs to complete
• Where NRV falls below cost the inventory is written down to its recoverable amount and the fall in value is charged to profit or loss
• Allocation of fixed production overheads to the costs of conversion

  Based on the normal capacity of the production facilities
• Allocation of variable production overheads to each unit

  Based on the actual use of production facilities
• Valuation methods


  • Actual unit cost
  • First in, first out (FIFO)
  • Weighted average method (AVCO)
• Where items of inventory are not ordinarily interchangeable (e.g. used cars), IAS 2 requires the actual unit cost valuation method to be used
• Where items are ordinarily interchangeable (e.g. tins of beans), the entity must choose between two cost formulae: the FIFO method and the AVCO method
• FRS 102 - UK GAAP has no such requirement as IAS 2 for measurement of inventories held for distribution at no or nominal consideration, or through a non-exchange transaction
• FRS 102 - UK GAAP allows impairment losses on inventory to be reversed if the circumstances which led to the impairment no longer exist, or if economic circumstances change