Friday, September 12, 2008

Revised IAS 2 Inventories, the history and the main changes

The History

IAS 2 Inventories was issued by the International Accounting Standards Committee (IASC) in December 1993. It replaced IAS 2 Valuation and Presentation of Inventories in the Context of the Historical Cost System (originally issued in October 1975).

The Standing Interpretations Committee developed SIC-1 Consistency-Different Cost Formulas for Inventories, which was issued in December 1997.

Limited amendments to IAS 2 were made in 1999 and 2000.

In December 2003, the IASB issued a revised IAS 2, which also replaced SIC-1.

The Main Changes of Revised IAS 2

The main changes from the previous version of IAS 2 are described below.

Objective and scope

The objective and scope paragraphs of IAS 2 were amended by removing the words ‘held under the historical cost system’, to clarify that the Standard applies to all inventories that are not specifically excluded from its scope.

Scope clarification

The Standard clarifies that some types of inventories are outside its scope while certain other types of inventories are exempted only from the measurement requirements in the Standard.

Paragraph 3 establishes a clear distinction between those inventories that are entirely outside the scope of the Standard (described in paragraph 2) and those inventories that are outside the scope of the measurement requirements but within the scope of the other requirements in the Standard.

Scope exemptions

The Standard does not apply to the measurement of inventories of producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realizable value in accordance with well-established industry practices.

The previous version of IAS 2 was amended to replace the words ‘mineral ores’ with ‘minerals and mineral products’ to clarify that the scope exemption is not limited to the early stage of extraction of mineral ores.

The Standard does not apply also to the measurement of inventories of commodity broker-traders to the extent that they are measured at fair value less costs to sell.

Cost of Inventories

IAS 2 does not permit exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency to be included in the costs of purchase of inventories.

This change from the previous version of IAS 2 resulted from the elimination of the allowed alternative treatment of capitalizing certain exchange differences in IAS 21 The Effects of Changes in Foreign Exchange Rates.

That alternative had already been largely restricted in its application by SIC-11 Foreign Exchange - Capitalization of Losses from Severe Currency Devaluation. SIC-11 has been superseded as a result of the revision of IAS 21 in 2003.

Paragraph 18 was inserted to clarify that when inventories are purchased with deferred settlement terms, the difference between the purchase price for normal credit terms and the amount paid is recognized as interest expense over the period of financing.

Cost formulas

The Standard incorporates the requirements of SIC-1 Consistency-Different Cost Formulas for Inventories that an entity use the same cost formula for all inventories having a similar nature and use to the entity. SIC-1 is superseded.

The Standard does not permit the use of the last-in, first-out (LIFO) formula to measure the cost of inventories.

Recognition as an expense

The Standard eliminates the reference to the matching principle.

The Standard also described the circumstances that would trigger a reversal of a write-down of inventories recognized in a prior period.


The Standard requires disclosure of the carrying amount of inventories carried at fair value less costs to sell.

The Standard also requires disclosure of the amount of any write-down of inventories recognized as an expense in the period and eliminates the requirement to disclose the amount of inventories carried at net realizable value.

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