IAS 2 “Inventories” in one page

This represents a short summary of the main aspects prescribed by IAS 2.

It is recommended for people who are familiar with IAS 2 and who want to shortly recap this standard or to see some recent updates. For people who are not familiar with IAS 2 or they want to know this standard I recommend firstly to read a detailed presentation of IAS 2.

The objective of IAS 2 is to prescribe the accounting treatment of inventories as well as their disclosure and presentation in the financial statements.

The main aspects to be kept in mind in relation to inventories accounting are:

  • the amount of cost to be recognised as an asset, accepted methods for determination of the cost, the recognition of inventories as an asset or expenses and write down to net realisable value (NRV)
  • Inventories are initially recorded at cost, and subsequently in financial statements at the the lower of cost and net realisable value (based on NRV test)
  • If cost is bigger than NRV then it will be recognised a loss in  P&L (profit and loss). In the following financial periods the NRV test will be re-performed and if the NRV will increase, the previous recognised loss will be reversed but only up to the limit of the initially recognised loss
  • FIFO and weighted average cost are the only accepted methods for inventories valuation. Even if in the past LIFO method was accepted as well and this method is accepted in different legislations, under IAS 2 this method is not allowed.
  • An entity that procures inventories will record them in accounting in the moment when the legal transfer passes from the seller to the buyer, in this respect one of the common error is to consider that inventories ownership is the same with physical possession of inventories
  • The cost of the finished goods produced will include all the costs related to production respectively direct cost of production and production overheads
  •  General and administrative costs and selling costs will not be included in the inventory value; these will be recognized as period expense. Storage costs have the same treatment.

 

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This entry was posted in Analiza Financiara (Controlling), Managementul Financiar al Firmei, Standarde internationale IFRS and tagged , , , . Bookmark the permalink.

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