IAS 2 Inventories summary - applies in 2024

Summary

In this video, Silvia, the founder of IFRSbox, explains the fundamentals of IAS 2, which governs the accounting of inventories. She discusses how inventories are classified, measured, and recognized, focusing on their purpose and cost. The video covers key aspects such as the definition of inventories, cost measurement techniques (e.g., FIFO, weighted average), and exclusions from costs like administrative overheads. Additionally, Silvia highlights exceptions for agricultural and mineral products and emphasizes the importance of correctly recognizing inventories in profit or loss. For more, viewers are encouraged to explore IFRSbox.com.

Takeaways

• 📚 Inventories are assets held for sale in the ordinary course of business, in the process of production, or materials used in production.
• 🏭 Items not considered inventories include occasional sales of property, plant, and equipment, as they are not part of normal business operations.
• 💼 Inventories should be measured at the lower of cost and net realizable value, with exceptions for certain producers and commodity dealers.
• 💰 Cost of inventories includes the cost of purchase (price, duties, and taxes), cost of conversion (materials, labor, overhead), and other relevant costs to bring items to their location and condition.
• 🚫 Items excluded from inventory costs are abnormal waste, storage costs (unless required for further production), administrative overheads, and selling costs.
• 🔢 IS-2 allows measurement techniques like standard cost (for producers of small items) and retail method (for retailers with large inventory turnovers).
• 📊 Cost formulas such as FIFO (First-In, First-Out) or weighted average are used when inventories are interchangeable. LIFO (Last-In, First-Out) is not allowed under IFRS.
• 📝 Net realizable value is calculated as the estimated selling price minus costs to complete and sell the item. Inventories should not be stated above this value.
• 💼 When inventories are sold, their carrying amount is recognized as an expense in the profit or loss statement. Any loss on inventories is recognized when it occurs.
• 🔄 If a previously written-down inventory's value increases, a reversal of the write-down is recognized as a reduction in the inventory expense for that period.

Q & A

What is the primary focus of IAS 2?

IAS 2 focuses on accounting for inventories. It defines how to classify, measure, and recognize inventories in financial statements.

How does IAS 2 define inventories?

IAS 2 defines inventories as assets held for sale in the ordinary course of business, in the process of production for such a sale, or materials and supplies to be consumed in the production process.

What items would not be classified as inventories under IAS 2?

Items like property, plant, and equipment that are occasionally sold and not in the ordinary course of business do not classify as inventories under IAS 2.

What are the basic types of inventories covered by IAS 2?

IAS 2 covers merchandise held for resale, production supplies, raw materials, work in progress, and finished goods.

How should inventories be measured according to IAS 2?

Inventories should be measured at the lower of cost and net realizable value, with exceptions for certain types of inventories like agricultural products and commodity dealers, which are measured at fair value less costs to sell.

What are the components of the cost of inventories under IAS 2?

The cost of inventories includes costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.

Which costs should not be included in the cost of inventories?

Abnormal waste, general administrative overheads, and selling costs should not be included in the cost of inventories. Storage costs should also be excluded unless necessary for the production process.

What measurement techniques are allowed under IAS 2?

IAS 2 allows the use of standard cost and retail methods as approximations for inventory cost when it is impractical to determine actual costs, such as for large quantities of small items.

What cost formulas are permitted by IAS 2?

IAS 2 permits the use of the First-In, First-Out (FIFO) method and the weighted average method for interchangeable inventories. Last-In, First-Out (LIFO) is not permitted under IFRS.

When should inventories be recognized as an expense?

Inventories should be recognized as an expense in profit or loss when they are sold. If the net realizable value falls below the cost, the inventories should be written down, and the loss recognized in the period the write-down occurs.