Part 3: Chapter 1 – Inventories (IAS 2) IAS 2 - I NVENTORIES D EFINITION Inventories are assets - Held for sale in the ordinary course of business; - In the process of production of such sale; or - In the form of materials or supplies to be consumed in the production process or in the rendering of services M EASUREMENT Inventories shall be measured at the lower of cost and net realizable value C OST The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. This means that in accordance with IAS 2, entities are required to apply full costing: all direct and indirect production costs have to be taken into account for the measurement of the inventories. The allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production capacity. Unallocated overheads are recognised as an expense in the period in which they are incurred. The following are examples of costs that are excluded from the cost of inventories and recognised as expenses in the period in which they are incurred: - Abnormal amounts of wasted materials, labour or other production 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 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. The cost of other inventories shall be assigned by using the first-in, first-out (FIFO) or weighted average cost formula. The same cost formula shall be applied for all inventories having a similar nature and use to the entity. N ET REALIZABLE VALUE The net realizable 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. R EFERENCES IASB, International Financial Reporting Standards, 2014, IAS 2 - Inventories . Refer to the standard or to disclosure checklists for the specific disclosure requirements of this standard. Page | 1
Part 3: Chapter 1 – Inventories (IAS 2) D ISCUSSIONS
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- Summer '17
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