Do you have difficulty understanding how to account for your inventory? Our expert accountants are here to provide insight on accounting for inventorying by highlighting the IAS 2 Inventories standard. IAS 2 provides us with the definition of an inventory and what should and should not be included in the cost of an inventory at the initial stages.

What is IAS 2?

The objective of IAS 2 is to prescribe the accounting treatment for inventories. It guides determining the cost of inventories and the subsequent recognition of the cost as an expense. It also includes any write-down to net realisable value. Guidance on the cost formulas used to assign costs to inventories is also provided.

Inventories.

Inventories are defined in three ways. They are assets held for sale in the ordinary course of business, in the process of production for sale or in the form of materials or supplies to be consumed in the production process or the rendering of purchase.

The cost of inventories includes all costs of purchase, costs of conversion (direct labour and production overhead) and other costs incurred in bringing the inventories to their present location and condition. The cost of inventories is assigned by:

• specific identification of cost for items of inventory that are not ordinarily interchangeable; and
• the first-in, first-out or weighted average cost formula for items that are ordinarily interchangeable (generally large quantities of individually insignificant items).

Inventories are measured at a lower cost and net realisable value. Service providers have inventories; they measure them at the costs of their production. They are primarily the costs of labour directly engaged in providing the service, including supervisory personnel and attributable overheads.

The cost of inventories of ordinarily interchangeable items and have not been produced and segregated for specific projects is determined by using the first-in, first-out (FIFO) or weighted average cost formula. The exact cost formula shall be adopted for all inventories having a similar nature and use to the entity.

Inventories are usually written down to net realisable value on an item-by-item basis unless it is more appropriate to group similar or related items.

When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all inventory losses are recognised as an expense in the period the write-down or loss occurs.

Why GCS Malta?

At GCS Malta, we can aid your business with sound advice based on years of experience in the Accounting industry. Get in touch now for more information.