IAS 2

IAS 2
Title	International Accounting Standard 2
Issued by	International Accounting Standards Committee; International Accounting Standards Board
First issued	1975
Last revised	2003
Status	Active
Subject	Accounting for inventories
Related	IFRS 15, IFRS 16, IAS 1, IAS 8

IAS 2

International Accounting Standard 2 prescribes accounting treatment for inventories to ensure comparability across reporting entities. It sets measurement bases, cost recognition rules, allowable cost formulas, and disclosure requirements for inventories held for sale, in production, or in the process of production for such sale. The Standard interacts with standards and institutions that govern financial reporting and audit oversight across jurisdictions.

Scope and objective

The objective is to prescribe the accounting treatment for inventories, guiding preparers, auditors, and users about recognition and measurement to provide reliable information for decision-makers in European Commission jurisdictions, United States-influenced markets, and other jurisdictions adopting International Financial Reporting Standards. The scope excludes inventories held by producers of agricultural and forest products that are measured at net realizable value under IAS 41; work in progress arising under construction contracts within the scope of IFRIC 12 or IFRS 15; and financial instruments and biological assets within other pronouncements. It applies to entities such as manufacturers similar to Toyota Motor Corporation, retailers like Walmart, and wholesalers comparable to Costco Wholesale Corporation.

Definitions and key terms

Key definitions include inventories, cost of purchase, cost of conversion, and net realizable value. Inventories are assets held for sale in the ordinary course of business by entities including Procter & Gamble, Unilever, and Siemens AG. Cost of purchase encompasses prices and import duties relevant to importers like Maersk or traders such as Glencore. Cost of conversion includes direct labor and production overheads typical for manufacturers like General Motors or Boeing. Net realizable value is influenced by market actors and conditions exemplified by events such as the 2008 financial crisis or commodity price shifts seen by BP plc and ExxonMobil.

Measurement of inventories

Inventories are measured at the lower of cost and net realizable value, a principle applied by firms across sectors including Samsung Electronics, Apple Inc., Nestlé, and Pfizer. Cost includes expenditures incurred to bring inventories to their present location and condition, relevant to logistics providers such as FedEx and DHL. Net realizable value reflects estimated selling price less costs to completion and costs to sell, considerations pertinent to retailers like Tesco and Aldi. Measurement approaches must consider impairment triggers comparable to those evaluated by auditors from firms such as Deloitte, PwC, KPMG, and Ernst & Young.

Cost formulas and cost components

Cost formulas permitted include first-in, first-out and weighted average cost; specific identification is allowed for items that are not ordinarily interchangeable, as occurs with bespoke manufacturers like Rolls-Royce Holdings or art dealers auctioning through Sotheby's or Christie's. Prohibited methods under the Standard include last-in, first-out, which has been disallowed in many jurisdictions influenced by institutions such as the International Monetary Fund and the World Bank. Cost components encompass direct materials procured from suppliers like BASF and Dow Chemical, direct labor applied by workforces similar to those at Siemens AG or Ford Motor Company, and systematic allocations of fixed and variable production overheads observed in factories operated by Volkswagen Group or Honda Motor Company.

Recognition as an expense and write-downs

When inventories are sold, their carrying amount is recognized as an expense in the period in which the related revenue is recognized—consistent with revenue frameworks used by entities such as Amazon (company), Alibaba Group, and eBay. Inventories are written down to net realizable value when cost exceeds estimated selling price less costs to complete and sell; such write-downs are comparable to impairment considerations addressed by IAS 36. Reversals of write-downs are required when circumstances that previously caused the write-down cease to exist, subject to constraints similar to those applied by regulators like the Securities and Exchange Commission and national standard-setters such as the Financial Accounting Standards Board in coordination with IFRS Foundation processes.

Disclosure requirements

Entities must disclose accounting policies adopted for inventories, the carrying amount by classification (raw materials, work in progress, finished goods), and amounts recognized as an expense for inventories during the period—information used by analysts at institutions like Goldman Sachs, Morgan Stanley, and JPMorgan Chase. Disclosures should include the total carrying amount of inventories pledged as security for liabilities, any write-downs or reversals recognized, and the circumstances leading to such changes, which aids stakeholders including investors in London Stock Exchange Group and regulators in European Securities and Markets Authority. Detailed disclosures assist auditors from firms such as Grant Thornton and BDO Global in assessing inventory assertions and help users compare financial statements across issuers listed on exchanges like New York Stock Exchange and Tokyo Stock Exchange.

Category:International Accounting Standards