1What is the objective of IAS 2?
The objective of IAS 2 is to prescribe the accounting treatment for inventories, including the determination of cost and the recognition of inventory as an expense when sold.
2How does IAS 2 define inventories?
Held for sale in the ordinary course of business (finished goods)
In the process of production for sale (work in progress)
In the form of materials or supplies to be consumed in production (raw materials)
3How should inventory be measured according to IAS 2?
Inventory should be measured at the lower of cost and net realizable value (NRV).
4What is Net Realizable Value (NRV)?
NRV is the estimated selling price in the ordinary course of business less the estimated costs of completion and costs necessary to make the sale.
5What costs are included in inventory valuation?
Cost of purchase – purchase price, import duties, taxes, and transport costs
Cost of conversion – direct labor, direct materials, and overheads
Other costs – only if incurred in bringing the inventory to its present location and condition
6should standard or actual costs be used
Standard cost can be used if it is close to actual costs - should be reviewed regularly
7What costs are excluded from inventory valuation?
Abnormal waste
Storage costs (unless necessary for production)
Selling costs
Administrative overheads unrelated to production
8What cost formulas can be used to measure inventory?
FIFO (First-In, First-Out) – Assumes older inventory is sold first.
Weighted Average Cost – Inventory cost is based on the average cost of items in stock.
🚫 LIFO (Last-In, First-Out) is NOT allowed under IAS 2.
9 When should inventory costs be recognized as an expense?
: Inventory costs should be recognized as an expense in the period in which the related revenue is recognized, i.e., when the goods are sold.
10How should inventory write-downs be treated?
If NRV falls below cost, inventory must be written down to NRV, and the loss is recognized as an expense in the income statement. If the NRV later increases, the write-down can be reversed up to the original cost.
11What disclosures are required under IAS 2?
Accounting policies used for inventory valuation
Total carrying amount of inventories by category
Amount of inventory recognized as an expense (cost of sales)
Amount of write-downs and any reversals
Details of the cirmunstances that have led to the write-down of inventories
12Under IAS 2 what would you classify display stock as?
Inventory as it will eventually be sold
13what are key triggers that will reduce NRV of inventory 7
Obsolescence – Products that become outdated due to technological advancements or changes in consumer preferences can lose value.
Physical Damage or Deterioration – Inventory that gets damaged or deteriorates over time (e.g., perishable goods, fragile items) may have to be sold at a discount or written off.
Market Price Decline – A drop in market prices due to increased competition, reduced demand, or economic downturns can lead to a lower NRV.
Excessive Inventory Levels – Holding too much inventory can result in markdowns or liquidation sales to clear stock, reducing its NRV.
Regulatory Changes – New laws or industry regulations can make certain inventory items non-compliant or obsolete, forcing businesses to sell at a lower value.
Customer-Specific Factors – If a company produces inventory for a specific customer and the order is canceled, the items may need to be sold at a lower price.
Increased Selling Costs – Higher costs for marketing, distribution, or fulfillment may reduce the net realizable amount of inventory.