IAS 2 on Inventories

International Accounting Standard on Inventories (IAS 2)

The following is a brief summary of IAS 2 on Inventories.

Definition

Inventories include:

1. FG = Finished Goods (assets held for sale in the ordinary course of business)

2. WIP = Work in Process (assets in the production process for sale in ordinary course of business)

3. DM = Materials & supplies consumed in production (raw materials)

Valuation

Inventories are valued at Lower of Cost and NRV (Net Realisable Value).

NRV = Net Realisable Value = the Estimated selling price in normal course of business less the Estimated cost to complete and make the sale.

FV = Fair Value = The amount at which an asset could be exchanged or liability settled between knowledgable willing parties in an arm's length transaction.

Cost of Inventories = Purchase cost + Conversion cost + Other costs incurred in bringing them to their present location & condition.

* Purchase Cost = PP (purchase price) + import duties + transport + handling cost for acquisition of the goods.

* Conversion Cost = Direct Labor + Overhead (variable + fixed)

* Other costs = Cost of designing products, etc

Excluded Costs from Inventory valuation:

- Abnormal amounts of wasted material, labor, other product costs.

- Storage costs

- Admin OH unrelated to production

- Selling costs

- Forex differences from acquisition of the inventories

- Interest cost

These costs should be expensed during the period.

Measurement

Inventory cost should be measured using one of these two methods:

* FIFO Method, or

* WAC (Weighted Average Cost) Method

Source: IAS 2 (www.iasplus.com/standard/ias02.htm)