This document summarizes International Accounting Standard 2 (IAS 2) which provides guidance on accounting for inventories. The key points are: 1) IAS 2 defines inventory as assets held for sale, in production, or in the form of materials used in production. It establishes cost as the default basis for valuing inventories. 2) Cost is determined using purchase costs, conversion costs, and other costs to bring inventory to its present condition and location. Net realizable value provides the floor for the valuation of inventory. 3) IAS 2 allows different cost flow assumptions - FIFO, LIFO, weighted average - and requires specific disclosures about inventory amounts, costs, and accounting policies.

1. Business Administration, KU
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3. International Accounting
Standers (IAS – 02) : Valuation of
Inventory

4. Content:
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• Introduction
• Definition
• Objective
• Related standards
• Scope
• Cost of Inventories
• Measurement of
inventories
• Methods of inventories
• Disclosure

5. Introduction :
 International Accounting Standard 2
Inventories (IAS 2) replaces IAS 2
Inventories (revised in 1993) and
 It should be applied for annual periods
beginning on or after 1 January 2005.
 It was revised in 2003 with the main
objective of reducing the alternatives for the
measurement of inventories
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6. Definition of inventory :
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Inventories are assets:
Held for the sale in the ordinary course of
business (Finished Goods).
In the process of production of such sale (Raw
material and working progress).
In the form of materials and supplies to be
consumed in the production process or in the
rendering of services (Stores, Spares, Raw
material).
Inventories do not include machinery.

7. Objective :
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 Prescribes the accounting treatment for inventories.
 Provides a primary issue in accounting for inventories is the
amount of cost to be record.
 Formulate the method of computation of cost of
inventories/stock.
 Determined the value of closing stock at which it is to be
shown in balance sheet till it is not sold and recognized as
revenue.

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Related Standards
 IAS 11 : Construction contracts
 IAS 32 : Financial instruments: Disclosure
and Presentation
 IAS 39 : Financial instruments: recognition
and measurement
 IAS 41 : Agriculture

9. DOES NOT APPLY TO THE FOLLOWING
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Determination of Cost of Inventories :
Cost of Inventories Includes:
 Cost of Purchase
 Cost of Conversion
 Other Costs (incurred in bringing the inventories
to their present location and condition)

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Cost of Purchase :
 The costs of purchase of inventories comprise the
purchase price, import duties and other taxes
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.

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Cost Of Conversion
 It Consists of the cost directly related to the
units(Direct Labor, Direct Material, Direct
Expenses)
Add:
 Systematic allocation of fixed and variable
production overheads that are incurred in
converting material into finished goods.

13. Other costs
Other Costs are recognized only if incurred in
bringing the inventories to their present location and
condition; never include the following:
 Abnormal Costs
 Storage Costs
 Administrative Overheads and Selling
Costs
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14. Measurement of Inventory :
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Inventories should be valued at the lower
of cost and net realizable value.

15. Net realizable value
Realizable value is, of course, the price of the organization
receives for its inventory from the market.
However, getting this inventory to market may involve
additional expense and
effort in repackaging,
advertising, delivery and
even repairing of damaged inventory.
Fair value is the amount for which an asset could be
exchanged, or a liability settled, between knowledgeable,
willing parties in an arm’s length transaction
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Which Value you should assign
to inventory?
Item Cost (Rs) Net realisable value
(Rs.)
1 No. 876 7,000 9,000
2 No. 997 12,000 12,500
3 No. 1822 8,000 4,000

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Costs not to be included in the
inventory cost :
 Abnormal losses of material, labor etc
 Storage costs
 Administrative overheads that are not to bring
the inventories at present location or condition
 Selling costs
 Borrowing costs (with some exceptions)

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Methods of computing Inventories
First-in, First-out (FIFO)
Last-in, First-out (LIFO)
Weighted-average cost (WAC)

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First-in, First-out (FIFO)
 This method assumes that the first unit acquired are
the first unit sold
 The costs of ending inventories is that of the most
recent purchases
 A major criticism of FIFO: Improper matching of
cost with revenues since the cost of goods sold is
computed on the bases of old price that are possibly
unrealistic

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Last-in, First-out (LIFO)
 This method assumes that the last unit acquired are
the first unit sold
 The cost of the units in the ending inventory is that of
the earliest purchases
 The chief advantage of LIFO is that balance sheet
value of inventories may be outdated and unrealistic

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Weighted average Cost (WAC)
 This method assumes that the goods available for the sale
are homogeneous
 The average cost is computed by dividing the cost of goods
available for sale by the number of the units available by
sale
 The major criticism of WAC is that it assigns no more
importance to current prices than to past prices paid several
months ago

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COST OF GOODS SOLD FORMULA :
Amount
 Opening Inventory X
 Add: Purchases X
 Add: Carriage Inwards X
 Less: Returns Outwards (X)
 Total goods Available X
 Less: Closing Inventory (X)
COST OF GOODS SOLD X

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Disclosure :
Disclosures needed for:
 Accounting policies applied
 Inventory remaining on statement of financial
position
 Inventory costs recognized in profit or loss

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Disclosure ( cont….)
Balance sheet related disclosures:
 Carrying amount in each category of inventory
(materials, WIP, finished goods, production
supplies, merchandise) and in total
 Carrying amount of any inventory measured
at fair value less costs to sell
 Carrying amount of inventory pledged as
collateral for liabilities

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Disclosure ( cont….)
Income statement related disclosures:
 Amount of inventory recognized as an
expense (usually cost of sales/cost of goods
sold)
 Amount of write-downs to NRV or other
losses
 Amount of any write-down reversals
 Circumstances that resulted in reversals

30. THANK YOU
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