IAS 2 Inventories: cost and net realisable value

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IAS 2 Inventories contains the requirements on how to account for most types of inventory. The standard requires inventories to be measured at the lower of cost and net realisable value (NRV) and outlines acceptable methods of determining cost, including specific identification (in some cases), first-in first-out (FIFO) and weighted average cost.

Inventory must be recorded at the lower of cost or net realizable value.

Cost Includes the purchase cost and any other costs necessary to bring the inventories to their present location and condition. These may include costs incurred directly in the production of inventory such as direct labour and production overheads (i.e. conversion costs) and other expenses such as transportation and handling charges, taxes and duties that may not be recoverable from tax authorities. However, costs do not include general and administrative costs which cannot reasonable attributed to the cost of inventory. Similarly, selling and distribution expenses, storage costs and excessive expenditure resulting from abnormal wastage shall not be included in the cost of inventory.

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