This free, guided checker walks your finance team through the key decision points for IAS 2 Inventory Measurement. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level IFRS screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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IAS 2 applies to inventories held for sale in the ordinary course of business, in the process of production for such sale, or as materials or supplies to be consumed in production or in rendering services (IAS 2.6). Confirm the item is not carved out by IAS 2.2 (financial instruments; biological assets and agricultural produce at harvest under IAS 41) and is not one of the IAS 2.3 measurement exceptions. The common trap is treating spare parts or servicing equipment as inventory when major spares meeting the IAS 16 recognition criteria are property, plant and equipment.
Apply other IFRS standards such as IAS 16 or IFRS 15 for non-inventory items.
Official guidance: IFRS issued standards
Inventories are measured at the lower of cost and net realisable value, comparing the two item by item (or by group of similar items) rather than across the whole portfolio (IAS 2.9; IAS 2.29). Weigh the cost build-up against a supportable NRV estimate for each line before recording any write-down. The exception to watch is IAS 2.3: commodity broker-traders measure at fair value less costs to sell, and certain agricultural and mineral producers at NRV, with changes taken to profit or loss rather than the lower-of-cost-and-NRV rule.
Apply lower of cost and net realisable value measurement under IAS 2.9.
Official guidance: IFRS issued standards
Net realisable value is the estimated selling price in the ordinary course of business less estimated costs of completion and costs necessary to make the sale under IAS 2.6.
Compute net realisable value using selling price less completion and selling costs.
Official guidance: IFRS issued standards
For ordinarily interchangeable items, assign cost using FIFO or weighted average cost, and apply the same formula to all inventories of a similar nature and use to the entity (IAS 2.25). Items that are not ordinarily interchangeable, or goods produced and segregated for specific projects, are costed by specific identification instead (IAS 2.23-24). LIFO is prohibited under IAS 2; the common trap is using different formulas for similar inventories across locations or segments, which the consistency requirement does not permit.
Select and apply FIFO or weighted average consistently for interchangeable inventories.
Official guidance: IFRS issued standards
Standard cost and the retail method are convenience techniques permitted only where the result approximates actual cost (IAS 2.21; IAS 2.22). Test the approximation by comparing the standard or retail carrying amount to an actual-cost recomputation for a sample and clearing any material variance to the inventory and cost of sales. The common trap is leaving stale standards unrevised so that accumulated purchase-price or efficiency variances build up an unrecognised difference from actual cost.
Use the interactive tool above to see how this applies to your situation.
Official guidance: IFRS issued standards
When a production run yields joint products (or a main product and a by-product) whose conversion costs are not separately identifiable, allocate the common cost on a rational and consistent basis, commonly relative sales value at the split-off point (IAS 2.14). Immaterial by-products are frequently measured at net realisable value and that value deducted from the cost of the main product. The common misapplication is allocating on physical volume when relative sales values differ sharply, which distorts each product's carrying amount.
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Official guidance: IFRS issued standards
Abnormal waste, storage costs not required in production, and administrative overheads not contributing to bringing inventories to present location and condition are expensed under IAS 2.16.
Remove abnormal and non-capitalizable costs from inventory carrying amount.
Official guidance: IFRS issued standards
When cost is not recoverable because inventories are damaged, wholly or partially obsolete, or their selling price has fallen, write them down to NRV and recognise the loss in profit or loss (IAS 2.28). Estimate NRV item by item, or by group only where items relate to the same product line and are not practicable to evaluate separately (IAS 2.29). The common misapplication is testing on total inventory, which lets a surplus on profitable lines mask a shortfall on impaired lines.
Use the interactive tool above to see how this applies to your situation.
Official guidance: IFRS issued standards
A reversal of a prior write-down is recognized as reduction in expense but only to the extent the new carrying amount does not exceed original cost under IAS 2.33.
Cap write-down reversal at original cost under IAS 2.33.
Official guidance: IFRS issued standards
Borrowing costs are included in inventory cost only when IAS 23 requires capitalization on qualifying inventories that take substantial time to produce.
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Official guidance: IFRS issued standards
IAS 2.36 requires disclosure of accounting policies, carrying amount by classification, and inventory recognized as expense during the period including write-downs and reversals.
Inventory measurement at lower of cost and NRV complete with required disclosures. Complete IAS 2 inventory note disclosures before finalizing entries.
Official guidance: IFRS issued standards
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