IAS 2
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IAS 2 – www.iasplus.com
Recognised as current assets in the SOFP
Held for sale in the ordinary course of
business
Includes work-in-progress, finished goods &
materials waiting to be used in production
process
Par 6: Inventories are assets:
 Held for sale in the ordinary course of
business (finished goods)
 In the process of production for such sale
(work in progress) ; or
 In the form of materials or supplies to be
consumed in the production process or in the
rendering of services (raw materials &
consumables)
Par 9:
Inventory shall be measured at the lower of
cost and net realisable value
Net realisable value < Cost
write down
Par 10: Cost of inventory shall comprise the
following:
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Cost of purchase (incl. transport inward & nonrefundable taxes arising from acquisition);
Costs of conversion (eg. direct labour, depreciation of
machinery, consumables & appropriate allocation of
fixed and variable overheads); and
All other costs incurred in bringing the inventories to
their present location and condition (eg. cost of
designing a product for a particular customer)
Par 16: Amounts specifically excluded from
cost:
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Abnormal amounts of wastage
Storage costs
General administrative overheads; and
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Selling expenses
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Recognised as expenses in I/S
Par 25: Cost of all inventory determined using
either:
 First-in-first-out (FIFO) cost formula
 Weighted average cost formula
◦ Average calculated on period basis (over a certain)
◦ Average per shipment received
Example – Ch.17 p.4
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Costs directly related to production ; eg.
direct labour costs
Systematic allocation of fixed & variable
production overheads incurred
Fixed overheads include the following:
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Factory supervisor’s wages
Rent & rates of factory
Depreciation & maintenance of factory equipment
Factory heating, repairs, insurance, payroll costs,
etc.
Example 17.3 – pg. 5
IAS 12 par 13:
 Allocation of fixed production overheads
 Based on normal capacity of production
facilities
 Normal capacity = average number of units
produced under normal circumstances
 Actual < Normal
Normal
 Actual > Normal
Actual
 Variable production overheads allocated
based on actual use of production facilities
Example 17.4 – pg. 7
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Valuation rule = lower of cost & net realisable
value
Write down to NRV when expected realisable
value < cost
NRV = Selling price (in the ordinary course of
business) – completion costs - selling costs
Each inventory item written down on item by
item basis, or groups of similar items not on
classification basis
Estimates of realisable value based on most
reliable evidence available
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Not normally written down to NRV
May be written down when as a result of
decline of price in raw material or when the
cost of finished goods > NRV
Replacement cost may be used as measure of
NRV of raw material
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When inventories sold:
◦ recognise carrying amount as expense
◦ In period related revenue recognised
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Write down of inventories:
◦ recognise loss/impairment as expense when it
occurs
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Reversal of write down
◦ Recognised in period it occurs
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Inventory as a separate line item in SOFP &
further analysis in the notes
Cost of sales presented as a separate line
item in I/S
Any expense (write-down; inventory losses)
recognised in the I/S
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Accounting policy adopted in measuring
Cost formula (FIFO or WA)
SOFP & Notes thereto:
◦ Total carrying amount of inventory
◦ Classifications
◦ Inventories pledged as security for liabilities
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I/S & Notes thereto:
◦ Inventories recognised as expense
◦ Write down of inventories & reversal (reduction of
expense)
◦ Circumstances that led to the reversal of a writedown