Prescribes the accounting treatment for inventories.
Provides guidance on determining the cost of inventories.
Addresses the subsequent recognition of cost as an expense (Cost of Goods Sold), including write-downs to Net Realizable Value (NRV).
Applies To:
All inventories, except for:
Work in progress under construction/service contracts (IFRS 15 *Revenue from Contracts with Customers*).
Financial instruments (IFRS 9 *Financial Instruments*).
Biological assets related to agricultural activity and agricultural produce at the point of harvest (IAS 41 *Agriculture*).
Note: IAS 2 exempts certain inventories from its standard measurement requirements (i.e., the lower of cost and NRV rule). This exemption applies to inventories held by:
- Producers of agricultural and forest products, agricultural produce after harvest, and minerals/mineral products, to the extent that they are measured at Net Realizable Value (NRV) in accordance with well-established practices in those industries.
- Commodity broker-traders who measure their inventories at fair value less costs to sell.
When these exemptions apply, changes in the measurement value are typically recognised in profit or loss. Other aspects of IAS 2 (e.g., disclosures) may still be relevant.
Inventories Include Assets Held:
As raw materials or supplies to be consumed in the production process or rendering of services.
In the process of production (Work-in-progress / WIP).
As finished goods for sale in the ordinary course of business.
As merchandise purchased for resale (e.g., by a retailer).
Initial Measurement:
Inventories are initially measured at Cost.
Subsequent Measurement:
At the end of each reporting period, inventories are measured at the lower of Cost and NRV.
This comparison is usually done item by item, but similar items may be grouped.
Net Realizable Value (NRV):
NRV is the estimated selling price in the ordinary course of business...
Less: Estimated costs of completion
Less: Estimated costs necessary to make the sale (selling costs)
NRV is an entity-specific value, unlike fair value. It reflects the net amount an entity expects to realize from selling the inventory.
Included in Cost:
Import duties and other non-recoverable taxes.
Transport, handling, and other costs directly attributable to acquiring finished goods, materials, and services.
Less: Trade discounts, rebates, and similar items.
Costs directly related to units of production, such as direct labor.
Systematic allocation of variable production overheads (e.g., indirect materials, indirect labor based on actual facility use).
Systematic allocation of fixed production overheads (e.g., depreciation, factory rent based on normal capacity levels).
Unallocated fixed overheads are expensed in the period incurred.
Only included if incurred in bringing the inventories to their present location and condition (e.g., specific design costs for a customer order).
Excluded from Cost (and expensed when incurred):
Abnormal amounts of wasted materials, labor, or other production costs.
Storage costs (unless necessary during the production process before a further production stage, e.g., maturing wine).
Administrative overheads that do not contribute to bringing inventories to their present location and condition.
Selling and distribution costs.
Foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency (usually treated per IAS 21).
Interest cost when inventories are purchased with deferred settlement terms (unless capitalized under IAS 23 *Borrowing Costs* for qualifying assets requiring substantial time).
FIFO (First-In, First-Out):
Assumes the items purchased or produced first are sold first.
Ending inventory consists of the most recently purchased or produced items.
Weighted Average Cost (WAC):
Cost of each item is determined from the weighted average of the cost of similar items at the beginning of the period and the cost of similar items purchased/produced during the period.
The average may be calculated on a periodic basis or as each additional shipment is received (moving average).
Required When:
The Cost of inventory is greater than its Net Realizable Value (NRV).
Physical damage or obsolescence.
Decline in selling prices.
Increase in estimated costs of completion or selling costs.
Accounting Treatment:
The amount of the write-down (Cost - NRV) is recognized as an expense in the period the write-down occurs (usually included in Cost of Sales).
A reversal of a previous write-down is recognized (as a reduction in expense) if the circumstances causing the write-down no longer exist or NRV has clearly increased.
The reversal is limited to the amount of the original write-down, ensuring the new carrying amount is the lower of cost and the revised NRV.
When Recognized:
When inventories are sold, the carrying amount of those inventories is recognized as an expense (Cost of Goods Sold / Cost of Sales) in the period in which the related revenue is recognized.
Any write-down of inventories to NRV and all losses of inventories are recognized as an expense in the period the write-down or loss occurs.
Any reversal of a write-down is recognized as a reduction in the amount of inventories recognized as an expense in the period in which the reversal occurs.
Other Situations:
Some inventories may be allocated to other asset accounts. For example, inventory used as a component of self-constructed Property, Plant and Equipment (PPE) is included in the cost of that asset (per IAS 16).
Required Disclosures in Notes:
The accounting policies adopted for measuring inventories, including the cost formula(s) used (FIFO or WAC).
The total carrying amount of inventories and the carrying amount in classifications appropriate to the entity (breakdown).
| Classification Example | Description |
| Raw materials | Materials and supplies awaiting use in production. |
| Work in progress | Goods currently in the production process but not yet complete. |
| Finished goods | Goods completed and held for sale. |
| Merchandise | Goods purchased for resale without further processing. |
The amount of inventories recognized as an expense during the period (Cost of Sales).
The amount of any write-down of inventories recognized as an expense.
The amount of any reversal of any write-down recognized as a reduction in expense.
The circumstances or events that led to the reversal of write-downs.
The carrying amount of inventories pledged as security for liabilities, if any.
Inventories Used in Service Contracts:
To the extent service providers have inventories (e.g., parts, materials used in service), they measure them at cost.
Cost includes labor and other personnel costs directly engaged in providing the service, including supervisory personnel and attributable overheads.
Labor and other costs relating to sales and general admin personnel are not included but are expensed when incurred. NRV for service inventories is typically the contract price less costs to complete/sell.
Agricultural Produce:
IAS 41 *Agriculture* applies to agricultural produce (product of biological assets) only up to the point of harvest.
After harvest, agricultural produce becomes inventory and IAS 2 applies. The initial cost under IAS 2 is typically the fair value less costs to sell at the point of harvest (determined under IAS 41).
Subsequently, these inventories are accounted for under IAS 2, generally at the lower of this deemed cost and NRV, unless the specific measurement exemption for certain producers (measuring at NRV post-harvest) applies, as noted in the Scope section.
