| INTERNATIONAL ACCOUNTING STANDARD 2 INVENTORIES | |
| OBJECTIVE | 1 |
| SCOPE | 2 |
| DEFINITIONS | 6 |
| MEASUREMENT OF INVENTORIES | 9 |
| Cost of inventories | 10 |
| Cost formulas | 23 |
| Net realisable value | 28 |
| RECOGNITION AS AN EXPENSE | 34 |
| DISCLOSURE | 36 |
| EFFECTIVE DATE | 40 |
| WITHDRAWAL OF OTHER PRONOUNCEMENTS | 41 |
| APPENDIX | |
| Amendments to other pronouncements | |
| APPROVAL BY THE BOARD OF IAS 2 ISSUED IN DECEMBER 2003 | |
FOR THE BASIS FOR CONCLUSIONS, SEE PART C OF THIS EDITION
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| BASIS FOR CONCLUSIONS | |
International Accounting Standard 2 Inventories (IAS 2) is set out in paragraphs 1–42 and the Appendix. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 2 should be read in the context of its objective and the Basis for Conclusions, the Preface to IFRS Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance. [Refer:IAS 8 paragraphs 10–12]
1 | The objective of this Standard is to prescribe the accounting treatment for inventories. A primary issue in accounting for inventories is the amount of cost to be recognised as an asset and carried forward until the related revenues are recognised. This Standard provides guidance on the determination of cost and its subsequent recognition as an expense, including any write‑down to net realisable value. It also provides guidance on the cost formulas [Refer:paragraphs 23–27] that are used to assign costs to inventories. |
2 | This Standard applies to all inventories, except:
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3 | This Standard does not apply to the measurement of inventories held by:
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4 | The inventories referred to in paragraph 3(a) are measured at net realisable value at certain stages of production. This occurs, for example, when agricultural crops have been harvested or minerals have been extracted and sale is assured under a forward contract or a government guarantee, or when an active market exists and there is a negligible risk of failure to sell. These inventories are excluded from only the measurement requirements of this Standard. |
5 | Broker‑traders are those who buy or sell commodities for others or on their own account. The inventories referred to in paragraph 3(b) are principally acquired with the purpose of selling in the near future and generating a profit from fluctuations in price or broker‑traders’ margin. When these inventories are measured at fair value less costs to sell, they are excluded from only the measurement requirements of this Standard. |
6 | The following terms are used in this Standard with the meanings specified: Inventories are assets:
Net realisable value is 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.E4 [Refer:paragraphs 28–33] Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See IFRS 13 Fair Value Measurement.) |
| E1 | [IFRIC® Update, March 2017, Agenda Decision, ‘Commodity loans’ The Committee received a request on how to account for a commodity loan transaction. Specifically, the transaction is one in which a bank borrows gold from a third party (Contract 1) and then lends that gold to a different third party for the same term and for a higher fee (Contract 2). The bank enters into the two contracts in contemplation of each other, but the contracts are not linked—ie the bank negotiates the contracts independently of each other. In each contract, the borrower obtains legal title to the gold at inception and has an obligation to return, at the end of the contract, gold of the same quality and quantity as that received. In exchange for the loan of gold, each borrower pays a fee to the respective lender over the term of the contract but there are no cash flows at inception of the contract. The Committee was asked whether, for the term of the two contracts, the bank that borrows and then lends the gold recognises:
The Committee observed that the particular transaction in the submission might not be clearly captured within the scope of any IFRS Standard. [The Committee observed, however, that particular IFRS Standards would apply to other transactions involving commodities (for example, the purchase of commodities for use in an entity’s production process, or the sale of commodities to customers).] In the absence of a Standard that specifically applies to a transaction, an entity applies paragraphs 10 and 11 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors in developing and applying an accounting policy to the transaction. In doing so, paragraph 11 of IAS 8 requires an entity to consider:
The Committee noted that, applying paragraph 10 of IAS 8, the accounting policy developed must result in information that is (i) relevant to the economic decision-making needs of users of financial statements; and (ii) reliable—ie represents faithfully the financial position, financial performance and cash flows of the entity; reflects the economic substance; and is neutral, prudent and complete in all material respects. The Committee observed that, in considering the requirements that deal with similar and related issues, an entity considers all the requirements dealing with those similar and related issues, including relevant disclosure requirements. The Committee also observed that the requirements in paragraph 112(c) of IAS 1 Presentation of Financial Statements are relevant if an entity develops an accounting policy applying paragraphs 10 and 11 of IAS 8 for a commodity loan transaction such as that described in the submission. In applying these requirements, an entity considers whether additional disclosures are needed to provide information relevant to an understanding of the accounting for, and risks associated with, such commodity loan transactions. The Committee concluded that it would be unable to resolve the question asked efficiently within the confines of existing IFRS Standards. The wide range of transactions involving commodities means that any narrow-scope standard-setting activity would be of limited benefit to entities and would have a high risk of unintended consequences. Consequently, the Committee decided not to add this matter to its standard-setting agenda.] |
| E2 | [IFRIC® Update, June 2019, Agenda Decision, ‘Holdings of Cryptocurrencies’ The Committee discussed how IFRS Standards apply to holdings of cryptocurrencies. The Committee noted that a range of cryptoassets exist. For the purposes of its discussion, the Committee considered a subset of cryptoassets with all the following characteristics that this agenda decision refers to as a ‘cryptocurrency’:
Nature of a cryptocurrency Paragraph 8 of IAS 38 Intangible Assets defines an intangible asset as ‘an identifiable non-monetary asset without physical substance’. Paragraph 12 of IAS 38 states that an asset is identifiable if it is separable or arises from contractual or other legal rights. An asset is separable if it ‘is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability’. Paragraph 16 of IAS 21 The Effects of Changes in Foreign Exchange Rates states that ‘the essential feature of a non-monetary item is the absence of a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency’. The Committee observed that a holding of cryptocurrency meets the definition of an intangible asset in IAS 38 on the grounds that (a) it is capable of being separated from the holder and sold or transferred individually; and (b) it does not give the holder a right to receive a fixed or determinable number of units of currency. Which IFRS Standard applies to holdings of cryptocurrencies? The Committee concluded that IAS 2 Inventories applies to cryptocurrencies when they are held for sale in the ordinary course of business. If IAS 2 is not applicable, an entity applies IAS 38 to holdings of cryptocurrencies. The Committee considered the following in reaching its conclusion. Intangible Asset IAS 38 applies in accounting for all intangible assets except:
Accordingly, the Committee considered whether a holding of cryptocurrency meets the definition of a financial asset in IAS 32 or is within the scope of another Standard. Financial asset Paragraph 11 of IAS 32 defines a financial asset. In summary, a financial asset is any asset that is: (a) cash; (b) an equity instrument of another entity; (c) a contractual right to receive cash or another financial asset from another entity; (d) a contractual right to exchange financial assets or financial liabilities with another entity under particular conditions; or (e) a particular contract that will or may be settled in the entity’s own equity instruments. The Committee concluded that a holding of cryptocurrency is not a financial asset. This is because a cryptocurrency is not cash (see below). Nor is it an equity instrument of another entity. It does not give rise to a contractual right for the holder and it is not a contract that will or may be settled in the holder’s own equity instruments. Cash Paragraph AG3 of IAS 32 states that ‘currency (cash) is a financial asset because it represents the medium of exchange and is therefore the basis on which all transactions are measured and recognised in financial statements. A deposit of cash with a bank or similar financial institution is a financial asset because it represents the contractual right of the depositor to obtain cash from the institution or to draw a cheque or similar instrument against the balance in favour of a creditor in payment of a financial liability’. The Committee observed that the description of cash in paragraph AG3 of IAS 32 implies that cash is expected to be used as a medium of exchange (ie used in exchange for goods or services) and as the monetary unit in pricing goods or services to such an extent that it would be the basis on which all transactions are measured and recognised in financial statements. Some cryptocurrencies can be used in exchange for particular good or services. However, the Committee noted that it is not aware of any cryptocurrency that is used as a medium of exchange and as the monetary unit in pricing goods or services to such an extent that it would be the basis on which all transactions are measured and recognised in financial statements. Consequently, the Committee concluded that a holding of cryptocurrency is not cash because cryptocurrencies do not currently have the characteristics of cash. Inventory IAS 2 applies to inventories of intangible assets. Paragraph 6 of that Standard defines inventories as assets:
The Committee observed that an entity may hold cryptocurrencies for sale in the ordinary course of business. In that circumstance, a holding of cryptocurrency is inventory for the entity and, accordingly, IAS 2 applies to that holding. The Committee also observed that an entity may act as a broker-trader of cryptocurrencies. In that circumstance, the entity considers the requirements in paragraph 3(b) of IAS 2 for commodity broker-traders who measure their inventories at fair value less costs to sell. Paragraph 5 of IAS 2 states that broker-traders are those who buy or sell commodities for others or on their own account. The inventories referred to in paragraph 3(b) are principally acquired with the purpose of selling in the near future and generating a profit from fluctuations in price or broker-traders’ margin. Disclosure In addition to disclosures otherwise required by IFRS Standards, an entity is required to disclose any additional information that is relevant to an understanding of its financial statements (paragraph 112 of IAS 1 Presentation of Financial Statements). In particular, the Committee noted the following disclosure requirements in the context of holdings of cryptocurrencies:
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| E3 | [IFRIC® Update, November 2014, Agenda Decision, ‘IAS 16 Property, Plant and Equipment and IAS 2 Inventories—Accounting for core inventories’ The Interpretations Committee received a request to clarify the accounting for ‘core inventories’. The submitter defined core inventories as a minimum amount of material that:
The issue is whether core inventories should be accounted for under IAS 16 or IAS 2. The Interpretations Committee discussed the issue at its March 2014 meeting and tentatively decided to develop an Interpretation. The Interpretations Committee further directed the staff to define the scope of what is considered to be core inventories and to analyse the applicability of the concept to a range of industries. At its July 2014 meeting the Interpretations Committee discussed the feedback received from informal consultations with IASB members, the proposed scope of core inventories and the staff analysis of the applicability of the issue to a range of industries. The Interpretations Committee observed that what might constitute core inventories, and how they are accounted for, can vary between industries. The Interpretations Committee noted that significant judgement might be needed in determining the appropriate accounting. Disclosure about such judgements might therefore be needed in accordance with paragraph 122 of IAS 1 Presentation of Financial Statements. The Interpretations Committee noted that it did not have clear evidence that the differences in accounting were caused by differences in how IAS 2 and IAS 16 were being applied. In the absence of such evidence, the Interpretations Committee decided to remove this item from its agenda.] |
| E4 | [IFRIC® Update, June 2021, Agenda Decision, ‘IAS 2 Inventories—Costs Necessary to Sell Inventories’ The Committee received a request about the costs an entity includes as the ‘estimated costs necessary to make the sale’ when determining the net realisable value of inventories. In particular, the request asked whether an entity includes all costs necessary to make the sale or only those that are incremental to the sale. Paragraph 6 of IAS 2 defines net realisable value as ‘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’. Paragraphs 28–33 of IAS 2 include further requirements about how an entity estimates the net realisable value of inventories. Those paragraphs do not identify which specific costs are ‘necessary to make the sale’ of inventories. However, paragraph 28 of IAS 2 describes the objective of writing inventories down to their net realisable value—that objective is to avoid inventories being carried ‘in excess of amounts expected to be realised from their sale’. The Committee observed that, when determining the net realisable value of inventories, IAS 2 requires an entity to estimate the costs necessary to make the sale. This requirement does not allow an entity to limit such costs to only those that are incremental, thereby potentially excluding costs the entity must incur to sell its inventories but that are not incremental to a particular sale. Including only incremental costs could fail to achieve the objective set out in paragraph 28 of IAS 2. The Committee concluded that, when determining the net realisable value of inventories, an entity estimates the costs necessary to make the sale in the ordinary course of business. An entity uses its judgement to determine which costs are necessary to make the sale considering its specific facts and circumstances, including the nature of the inventories. The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for an entity to determine whether the estimated costs necessary to make the sale are limited to incremental costs when determining the net realisable value of inventories. Consequently, the Committee decided not to add a standard-setting project to the work plan.] |
7 | Net realisable value refers to the net amount that an entity expects to realise from the sale of inventory in the ordinary course of business. Fair value reflects the price at which an orderly transaction to sell the same inventory in the principal (or most advantageous) market [Refer:IFRS 13 paragraph 16] for that inventory would take place between market participants [Refer:IFRS 13 Appendix A] at the measurement date [Refer:IFRS 13 paragraph B35(f)]. The former is an entity‑specific value; the latter is not. Net realisable value for inventories may not equal fair value less costs to sell. |
8 | Inventories encompass goods purchased and held for resale including, for example, merchandise purchased by a retailer and held for resale, or land and other property held for resale. Inventories also encompass finished goods produced, or work in progress being produced, by the entity and include materials and supplies awaiting use in the production process. Costs incurred to fulfil a contract with a customer that do not give rise to inventories (or assets within the scope of another Standard) are accounted for in accordance with IFRS 15 Revenue from Contracts with Customers. |
9 | Inventories shall be measured at the lower of cost [Refer:paragraphs 10–27] and net realisable value. [Refer:paragraphs 28–33] |
10 | The cost of inventories shall comprise all costs of purchase, [Refer:paragraph 11] costs of conversion [Refer:paragraphs 12–14] and other costs [Refer:paragraphs 15–18] incurred in bringing the inventories to their present location and condition. |
11 | The costs of purchase of inventories comprise the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Trade discounts, rebates and other similar items are deducted in determining the costs of purchase.E5,E6 |
| E5 | [IFRIC® Update, August 2002, Agenda Decision, ‘Inventories - cash discounts’ This issue considers how a purchaser of goods should account for cash discounts received. The IFRIC agreed not to require publication of an Interpretation on this issue because IAS 2 Inventories paragraph 8 provides adequate guidance. Cash discounts received should be deducted from the cost of the goods purchased. [Paragraph 8 was renumbered paragraph 11 of IAS 2 as a result of the Improvements project.] |
| E6 | [IFRIC® Update, November 2004, Agenda Decision, ‘IAS 2 Inventories: Discounts and rebates’ The IFRIC considered three related questions on the application of IAS 2 Inventories that had been referred to it by the Urgent Issues Group (UIG) of the Australian Accounting Standards Board:
On (a), the IFRIC tentatively agreed that settlement discounts should be deducted from the cost of inventories. Because the requirements under IFRSs were sufficiently clear, the IFRIC tentatively agreed that the matter should not be added to the agenda. On (b), the IFRIC tentatively agreed that IAS 2 requires only those rebates and discounts that have been received as a reduction in the purchase price of inventories to be taken into consideration in the measurement of the cost of the inventories. Rebates that specifically and genuinely refund selling expenses would not be deducted from the costs of inventories. Because the requirements under IFRSs were sufficiently clear, the IFRIC tentatively agreed that the matter should not be added to the agenda. On (c), the IFRIC tentatively agreed that there was insufficient evidence of diversity in practice to warrant the matter being added to the agenda.] |
12 | The costs of conversion of inventories include costs directly related to the units of production, such as direct labour. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings, equipment and right‑of‑use assets used in the production process, and the cost of factory management and administration. Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labour. |
13 | The allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities. Normal capacity is the production expected to be achieved on average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The actual level of production may be used if it approximates normal capacity. The amount of fixed overhead allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognised as an expense in the period in which they are incurred. In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased so that inventories are not measured above cost. Variable production overheads are allocated to each unit of production on the basis of the actual use of the production facilities. |
14 | A production process may result in more than one product being produced simultaneously. This is the case, for example, when joint products are produced or when there is a main product and a by‑product. When the costs of conversion of each product are not separately identifiable, they are allocated between the products on a rational and consistent basis. The allocation may be based, for example, on the relative sales value of each product either at the stage in the production process when the products become separately identifiable, or at the completion of production. Most by‑products, by their nature, are immaterial. When this is the case, they are often measured at net realisable value and this value is deducted from the cost of the main product. As a result, the carrying amount of the main product is not materially different from its cost. |
15 | Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be appropriate to include non‑production overheads or the costs of designing products for specific customers in the cost of inventories. |
16 | Examples of costs excluded from the cost of inventories and recognised as expenses in the period in which they are incurred are:
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17 | IAS 23 Borrowing Costs identifies limited circumstances where borrowing costs are included in the cost of inventories. |
18 | An entity may purchase inventories on deferred settlement terms. When the arrangement effectively contains a financing element, that element, for example a difference between the purchase price for normal credit terms and the amount paid, is recognised as interest expense over the period of the financing.E7 |
| E7 | [IFRIC® Update, November 2015, Agenda Decision, ‘IAS 2 Inventories—Prepayments in long-term supply contracts’ The Interpretations Committee received a request seeking clarification on the accounting for long-term supply contracts for inventories when the purchaser agrees to make significant prepayments to the supplier. The question considered is whether the purchaser should accrete interest on long-term prepayments by recognising interest income, resulting in an increase in the cost of inventories and, ultimately, the cost of sales. The Interpretations Committee discussed this issue and noted that paragraph 18 of IAS 2 Inventories requires that when an entity purchases inventories on deferred settlement terms, and the arrangement contains a financing element, the difference between the purchase price on normal credit terms and the amount paid is recognised separately as interest expense over the period of the financing. It also noted that IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets include similar requirements when payment for an asset is deferred. IFRS 15 Revenue from Contracts with Customers, issued in May 2014, additionally includes the requirement that the financing component of a transaction should be recognised separately in circumstances of both prepayment and deferral of payment. The Interpretations Committee conducted outreach on this issue, but the outreach returned very limited results. In the absence of evidence about this issue, and of a broader range of information about the facts and circumstances relating to these transactions, the Interpretations Committee thought it would be difficult for it to address this topic efficiently and effectively. The Interpretations Committee observed, however, that when a financing component is identified in a long-term supply contract, that financing component should be accounted for separately. The Interpretations Committee acknowledged that judgement is required to identify when individual arrangements contain a financing component. The Interpretations Committee concluded that this issue did not meet its agenda criteria and therefore it decided to remove this issue from its agenda.] |
19 | [Deleted] |
20 | In accordance with IAS 41 Agriculture inventories comprising agricultural produce that an entity has harvested from its biological assets are measured on initial recognition at their fair value less costs to sell at the point of harvest. This is the cost of the inventories at that date for application of this Standard. [Refer:IAS 41 paragraph 13] |
21 | Techniques for the measurement of the cost of inventories, such as the standard cost method or the retail method, may be used for convenience if the results approximate cost. Standard costs take into account normal levels of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revised in the light of current conditions. |
22 | The retail method is often used in the retail industry for measuring inventories of large numbers of rapidly changing items with similar margins for which it is impracticable to use other costing methods. The cost of the inventory is determined by reducing the sales value of the inventory by the appropriate percentage gross margin. The percentage used takes into consideration inventory that has been marked down to below its original selling price. An average percentage for each retail department is often used. |
23 | The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be assigned by using specific identification of their individual costs. |
24 | Specific identification of cost means that specific costs are attributed to identified items of inventory. This is the appropriate treatment for items that are segregated for a specific project, regardless of whether they have been bought or produced. However, specific identification of costs is inappropriate when there are large numbers of items of inventory that are ordinarily interchangeable. In such circumstances, the method of selecting those items that remain in inventories could be used to obtain predetermined effects on profit or loss. |
25 | The cost of inventories, other than those dealt with in paragraph 23, shall be assigned by using the first‑in, first‑out (FIFO) or weighted average cost formula. [Refer:paragraph 27] An entity shall use the same cost formula for all inventories having a similar nature and use to the entity. For inventories with a different nature or use, different cost formulas may be justified. [Refer:Basis for Conclusions paragraphs BC9–BC21 (for exclusion of the LIFO cost formula)]
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26 | For example, inventories used in one operating segment [Refer:IFRS 8 paragraphs 5–10] may have a use to the entity different from the same type of inventories used in another operating segment. However, a difference in geographical location of inventories (or in the respective tax rules), by itself, is not sufficient to justify the use of different cost formulas. |
27 | The FIFO formula assumes that the items of inventory that were purchased or produced first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average may be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances of the entity. |
| E8 | [IFRIC® Update, March 2004, ‘Consumption of inventories by a service organisation’ The issue related to the consumption of inventories by a service entity, in particular the assessment of net realisable value when the inventory is consumed as part of the service rendered. The IFRIC noted that the same issues existed for commercial entities. The IFRIC concluded that this matter was one of assessing the recoverability of an asset without a direct cash flow.] |
28 | The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. The cost of inventories may also not be recoverable if the estimated costs of completion or the estimated costs to be incurred to make the sale have increased. The practice of writing inventories down below cost to net realisable value is consistent with the view that assets should not be carried in excess of amounts expected to be realised from their sale or use. |
29 | Inventories are usually written down to net realisable value item by item. In some circumstances, however, it may be appropriate to group similar or related items. This may be the case with items of inventory relating to the same product line that have similar purposes or end uses, are produced and marketed in the same geographical area, and cannot be practicably evaluated separately from other items in that product line. It is not appropriate to write inventories down on the basis of a classification of inventory, for example, finished goods, or all the inventories in a particular operating segment [Refer:IFRS 8 paragraphs 5–10]. |
30 | Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made, of the amount the inventories are expected to realise. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period. [Refer:IAS 10 paragraphs 7–11] |
31 | Estimates of net realisable value also take into consideration the purpose for which the inventory is held. For example, the net realisable value of the quantity of inventory held to satisfy firm sales or service contracts is based on the contract price. If the sales contracts are for less than the inventory quantities held, the net realisable value of the excess is based on general selling prices. Provisions may arise from firm sales contracts in excess of inventory quantities held or from firm purchase contracts. Such provisions are dealt with under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. |
32 | Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. However, when a decline in the price of materials indicates that the cost of the finished products exceeds net realisable value, the materials are written down to net realisable value. In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value. |
33 | A new assessment is made of net realisable value in each subsequent period. When the circumstances that previously caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase in net realisable value because of changed economic circumstances, the amount of the write‑down is reversed (ie the reversal is limited to the amount of the original write‑down) so that the new carrying amount is the lower of the cost and the revised net realisable value. This occurs, for example, when an item of inventory that is carried at net realisable value, because its selling price has declined, is still on hand in a subsequent period and its selling price has increased. |
34 | When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised. [Refer:IFRS 15 paragraph 31] The amount of any write‑down of inventories to net realisable value and all losses of inventories shall be recognised as an expense in the period the write‑down or loss occurs. The amount of any reversal of any write‑down of inventories, arising from an increase in net realisable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs. |
35 | Some inventories may be allocated to other asset accounts, for example, inventory used as a component of self‑constructed property, plant or equipment [Refer:IAS 16 paragraph 22]. Inventories allocated to another asset in this way are recognised as an expense during the useful life of that asset. |
36 | The financial statements shall disclose:
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37 | Information about the carrying amounts held in different classifications of inventories and the extent of the changes in these assets is useful to financial statement users. [Refer:Conceptual Framework paragraphs 1.2-1.10 and 2.36] Common classifications of inventories are merchandise, production supplies, materials, work in progress and finished goods.
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38 | The amount of inventories recognised as an expense during the period, which is often referred to as cost of sales, consists of those costs previously included in the measurement of inventory that has now been sold and unallocated production overheads and abnormal amounts of production costs of inventories. The circumstances of the entity may also warrant the inclusion of other amounts, such as distribution costs. |
39 | Some entities adopt a format for profit or loss that results in amounts being disclosed other than the cost of inventories recognised as an expense during the period. Under this format, an entity presents an analysis of expenses using a classification based on the nature of expenses. In this case, the entity discloses the costs recognised as an expense for raw materials and consumables, labour costs and other costs together with the amount of the net change in inventories for the period. [Refer:IAS 1 paragraph 102] |
40 | An entity shall apply this Standard for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. If an entity applies this Standard for a period beginning before 1 January 2005, it shall disclose that fact. |
40A | [Deleted] |
40B | [Deleted] |
40C | IFRS 13, issued in May 2011, amended the definition of fair value in paragraph 6 and amended paragraph 7. An entity shall apply those amendments when it applies IFRS 13. |
40D | [Deleted] |
40E | IFRS 15 Revenue from Contracts with Customers, issued in May 2014, amended paragraphs 2, 8, 29 and 37 and deleted paragraph 19. An entity shall apply those amendments when it applies IFRS 15. |
40F | IFRS 9, as issued in July 2014, amended paragraphs 2 and deleted paragraphs 40A, 40B and 40D. An entity shall apply those amendments when it applies IFRS 9. |
40G | IFRS 16 Leases, issued in January 2016, amended paragraph 12. An entity shall apply that amendment when it applies IFRS 16. |
41 | This Standard supersedes IAS 2 Inventories (revised in 1993). |
42 | This Standard supersedes SIC‑1 Consistency—Different Cost Formulas for Inventories. |
The amendments in this appendix shall be applied for annual periods beginning on or after 1 January 2005. If an entity applies this Standard for an earlier period, these amendments shall be applied for that earlier period.
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The amendments contained in this appendix when this Standard was revised in 2003 have been incorporated into the relevant pronouncements published in this volume.
International Accounting Standard 2 Inventories (as revised in 2003) was approved for issue by the fourteen members of the International Accounting Standards Board.
| Sir David Tweedie | Chairman |
| Thomas E Jones | Vice‑Chairman |
| Mary E Barth | |
| Hans-Georg Bruns | |
| Anthony T Cope | |
| Robert P Garnett | |
| Gilbert Gélard | |
| James J Leisenring | |
| Warren J McGregor | |
| Patricia L O’Malley | |
| Harry K Schmid | |
| John T Smith | |
| Geoffrey Whittington | |
| Tatsumi Yamada |