What IAS 2 covers
IAS 2 Inventories establishes how to measure inventories and what costs to include. The standard applies to all inventories except construction contracts (IAS 11/IFRS 15), financial instruments, and biological assets (IAS 41). It prescribes a single measurement model — lower of cost and net realisable value — that applies from initial recognition through every subsequent reporting date.
Measurement framework
The two pillars of IAS 2 are cost determination and the NRV test. Every reporting period, entities compare the carrying amount of each inventory item against its NRV and write down any excess.
- Inventory measurement → The complete lower-of-cost-and-NRV framework: when to write down, how to test, and when reversals are required.
- Net realisable value → How to calculate NRV, item-by-item vs group assessment, and the mechanics of write-down and reversal.
Cost determination
Defining "cost" correctly is where most errors occur. IAS 2 distinguishes between costs that must be capitalised, costs that must be excluded, and the method used to assign costs to specific units.
- Cost of inventories → Three-component cost model: costs of purchase (IAS 2.11), costs of conversion (IAS 2.12), and other costs — plus the long list of items that must be expensed immediately (IAS 2.16).
- Overhead absorption → Normal capacity rule for fixed production overheads: how to calculate it, what happens to unabsorbed overhead, and the most common audit finding on this topic.
- Cost formulas → FIFO vs weighted average cost — when to use each, consistency requirement, and why LIFO is prohibited under IFRS.
Disclosure
- Disclosure requirements → What IAS 2.36 requires: carrying amounts by category, cost formulas, write-down amounts, reversals, and pledged inventories.
Key paragraphs at a glance
- IAS 2.9 — Core measurement rule: lower of cost and NRV.
- IAS 2.10 — Three components of cost: purchase, conversion, other.
- IAS 2.12–13 — Fixed production overhead allocated on normal capacity; excess expensed.
- IAS 2.16 — Costs excluded from inventory (abnormal waste, storage, admin overheads).
- IAS 2.23–25 — Specific identification for segregated items; FIFO/WA for all others.
- IAS 2.28–29 — Write-down to NRV; item-by-item approach with limited grouping.
- IAS 2.33 — Mandatory reversal of write-down when NRV recovers.
- IAS 2.36 — Disclosure requirements.
