Accounting for Inventories (IAS 2)

Applicable Standard

  • IAS 2: Inventories

Types of Inventories

  • Finished goods
  • Work-in-progress
  • Raw materials

Valuation of Inventories

Inventories are valued at lower of

  • Cost; and
    • Cost = Cost of purchase + cost of conversion + other costs to bring the inventories to their present location and condition
    • Cost of purchase = Cost of purchase – trade discounts
    • Cost of conversion = Direct costs (labour and expenses) + Indirect costs (share of production overheads)
    • Other costs = Import duties + transport costs + other handling costs
  • Net realisable value (NRV)
    • NRV = Estimated selling price – estimated cost to complete the item for sale – estimated cost to make the sale

Measuring the Cost of Goods Sold (from Inventories)

  • Actual cost is used if items sold can be individually identified, else either FIFO (First-In-First-Out) or AVCO (Weighted Average Cost) is used.
  • LIFO (Last-In-First-Out) is no longer allowed.

Accounting for Write-downs

  • Expense recognised in P&L.
  • Cr Inventory, Dr Inventory Write-down Expense




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