In April 2001 the International Accounting Standards Board (IASB) 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 IASB 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 IFRSs have made minor consequential amendments to IAS 2. They include IFRS 9

Financial Instruments (issued November 2009 and October 2010), IFRS 13 Fair Value Measurement (issued May 2011) and IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013).

CONTENTS

INTRODUCTION

INTERNATIONAL ACCOUNTING STANDARD 2

INVENTORIES

OBJECTIVE

SCOPE

DEFINITIONS

MEASUREMENT OF INVENTORIES

Cost of inventories

Costs of purchase

Costs of conversion

Other costs

Cost of inventories of a service provider

Cost of agricultural produce harvested from biological assets

Techniques for the measurement of cost

Cost formulas

Net realisable value

RECOGNITION AS AN EXPENSE

DISCLOSURE

EFFECTIVE DATE

WITHDRAWAL OF OTHER PRONOUNCEMENTS

APPENDIX

Amendments to other pronouncements

from paragraph

FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS

EDITION

APPROVAL BY THE BOARD OF IAS 2 ISSUED IN DECEMBER 2003

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 International Financial Reporting 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.

Introduction

IN1           International Accounting Standard 2 Inventories (IAS 2) replaces IAS 2 Inventories

(revised in 1993) and should be applied for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. The Standard also supersedes SIC-1 Consistency—Different Cost Formulas for Inventories.

Reasons for revising IAS 2

The International Accounting Standards Board developed this revised IAS 2 as part of its project on Improvements to International Accounting Standards. The project was undertaken in the light of queries and criticisms raised in relation to the Standards by securities regulators, professional accountants and other interested parties. The objectives of the project were to reduce or eliminate alternatives, redundancies and conflicts within the Standards, to deal with some convergence issues and to make other improvements.

For IAS 2 the Board's main objective was a limited revision to reduce alternatives for the measurement of inventories. The Board did not reconsider the

fundamental approach to accounting for inventories contained in IAS 2.

The main changes

The main changes from the previous version of IAS 2 are described below.

Objective and scope

The objective and scope paragraphs of IAS 2 were amended by removing the

words 'held under the historical cost system', to clarify that the Standard applies to all inventories that are not specifically excluded from its scope.

Scope clarification

The Standard clarifies that some types of inventories are outside its scope while

certain other types of inventories are exempted only from the measurement requirements in the Standard.

Paragraph 3 establishes a clear distinction between those inventories that are entirely outside the scope of the Standard (described in paragraph 2) and those inventories that are outside the scope of the measurement requirements but within the scope of the other requirements in the Standard.

Scope exemptions

Producers of agricultural and forest products, agricultural produce after harvest and minerals and mineral products

The Standard does not apply to the measurement of inventories of producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value in accordance with well-established industry practices. The previous version of IAS 2 was amended to replace the words 'mineral ores' with

'minerals and mineral products' to clarify that the scope exemption is not limited to the early stage of extraction of mineral ores.

Inventories of commodity broker-traders

The Standard does not apply to the measurement of inventories of commodity broker-traders to the extent that they are measured at fair value less costs to sell.

Cost of inventories

Costs of purchase

IAS 2 does not permit exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency to be included in the costs of purchase of inventories. This change from the previous version of IAS 2 resulted from the elimination of the allowed alternative treatment of capitalising certain exchange differences in IAS 21 The Effects of Changes in Foreign Exchange Rates. That alternative had already been largely restricted in its application by SIC-11 Foreign Exchange—Capitalisation of Losses from Severe Currency Devaluations. SIC-11 has been superseded as a result of the revision of IAS 21 in 2003.

Other costs

Paragraph 18 was inserted to clarify that when inventories are purchased with deferred settlement terms, the difference between the purchase price for normal credit terms and the amount paid is recognised as interest expense over the period of financing.

Cost formulas

Consistency

The Standard incorporates the requirements of SIC-1 Consistency—Different Cost

Formulas for Inventories that an entity use the same cost formula for all inventories having a similar nature and use to the entity. SIC-1 is superseded.

Prohibition of LIFO as a cost formula

The Standard does not permit the use of the last-in, first-out (LIFO) formula to measure the cost of inventories.

Recognition as an expense

The Standard eliminates the reference to the matching principle.

The Standard describes the circumstances that would trigger a reversal of a write-down of inventories recognised in a prior period.

Disclosure

Inventories carried at fair value less costs to sell

The Standard requires disclosure of the carrying amount of inventories carried at fair value less costs to sell.

Write-down of inventories

The Standard requires disclosure of the amount of any write-down of inventories

recognised as an expense in the period and eliminates the requirement to disclose the amount of inventories carried at net realisable value.

International Accounting Standard 2

Inventories

Objective

Scope

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 that are used to assign costs to inventories.

This Standard applies to all inventories, except:

(a)       work in progress arising under construction contracts, including

directly related service contracts (see IAS 11 Construction

Contracts);

(b)       financial      instruments (see IAS 32 Financial                   Instruments:

Presentation and IFRS 9 Financial Instruments); and

(c)        biological assets related to agricultural activity and agricultural

produce at the point of harvest (see IAS 41 Agriculture).

This Standard does not apply to the measurement of inventories held by:

(producers of agricultural and forest products, agricultural

produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value in accordance

with well-established practices in those industries.                      When such

inventories are measured at net realisable value, changes in that value are recognised in profit or loss in the period of the change.

commodity broker-traders who measure their inventories at fair

value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognised in profit or loss in the period of the change.

             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.

Definitions

6             The following terms are used in this Standard with the meanings

specified:

Inventories are assets:

(a)     held for sale in the ordinary course of business;

(b)      in the process of production for such sale; or

(c)      in the form of materials or supplies to be consumed in the

production process or in the rendering of services.

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.

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.)

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 for that inventory would take place between market participants at the measurement date. 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. In the case of a service provider, inventories include the costs of the service, as described in paragraph 19, for which the entity has not yet recognised the related revenue (see IAS 18 Revenue).

Measurement of inventories

Inventories shall be measured at the lower of cost and net realisable value.

Cost of inventories

The cost of inventories shall comprise all costs of purchase, costs of

conversion and other costs incurred in bringing the inventories to their present location and condition.

Costs of purchase

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.

Costs of conversion

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 ofproduction, such as depreciation and maintenance of factory buildings and equipment, 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.

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.

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.

Other costs

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:

costs;

storage costs, unless those costs are necessary in the production process

before a further production stage;

administrative overheads that do not contribute to bringing inventories

to their present location and condition; and

selling costs.

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.

Cost of inventories of a service provider

To the extent that service providers have inventories, they measure them at the costs of their production. These costs consist primarily of the labour and other costs of personnel directly engaged in providing the service, including supervisory personnel, and attributable overheads. Labour and other costs relating to sales and general administrative personnel are not included but are recognised as expenses in the period in which they are incurred. The cost of inventories of a service provider does not include profit margins or non-attributable overheads that are often factored into prices charged by service providers.

Cost of agricultural produce harvested from biological assets

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.

Techniques for the measurement of cost

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.

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.

Cost formulas

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.

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.

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. 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.

For example, inventories used in one operating segment 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.

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.

Net realisable value

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.

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

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