IAS 2 provides guidance for determining the cost of inventories and the subsequent recognition of the cost as an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. Inventories are measured at the lower of cost and net realisable value. 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.
The cost of inventories includes all costs of purchase, costs of conversion (direct labour and production overhead) and other costs incurred in bringing the inventories to their present location and condition. The cost of inventories is assigned by:
When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs.
In April 2001 the International Accounting Standards Board (Board) adopted IAS 2 Inventories, which had originally been issued by the International Accounting Standards Committee in December 1993. IAS 2 Inventories replaced IAS 2 Valuation and Presentation of Inventories in the Context of the Historical Cost System (issued in October 1975).
In December 2003 the Board issued a revised IAS 2 as part of its initial agenda of technical projects. The revised IAS 2 also incorporated the guidance contained in a related Interpretation (SIC‑1 Consistency—Different Cost Formulas for Inventories).
Other Standards have made minor consequential amendments to IAS 2. They include IFRS 13 Fair Value Measurement (issued May 2011), IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013), IFRS 15 Revenue from Contracts with Customers (issued May 2014), IFRS 9 Financial Instruments (issued July 2014) and IFRS 16 Leases (issued January 2016).