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| International Accounting standard(IAS) |
What is the International Accounting Standards (IAS-2)? Describes in details:
IAS-2 (International Accounting Standard 2) is a standard issued by the International Accounting Standards Board (IASB) that provides guidelines on the accounting for inventories. The primary goal of IAS 2 is to establish how inventories should be measured and reported in financial statements.
Key aspects of IAS-2 include:
1.Definition of Inventories:
IAS 2 defines inventories as assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or the rendering of services.
2.Measurement of Inventories:
Inventories are required to be measured at the lower of cost and net realizable value. The cost of inventories includes all costs incurred to bring the inventory to its present condition and location, such as purchase costs, production costs, and other associated costs.
3.Costing Methods:
IAS 2 allows companies to use different methods to determine the cost of inventories, including:
First-in, first-out (FIFO):
Assumes that the earliest goods purchased or produced are the first to be sold.
Weighted average cost: Averages the cost of all similar items in inventory.
Specific identification: Used for items that are unique or not interchangeable, where each item is individually identified.
4.Net Realizable Value (NRV):
If the net realizable value (the estimated selling price minus estimated costs to complete and sell) of an inventory item is lower than its cost, it must be written down to the lower amount.
5.Inventory Write-downs:
If the net realizable value falls below the cost, the inventory must be written down, and the loss is recognized in the income statement. If the value recovers in future periods, the write-down can be reversed, but only to the extent of the original write-down.
In short, IAS-2 provides guidance on how to measure and value inventories, emphasizing that they should be recorded at the lower of cost or net realizable value to ensure that financial statements reflect an accurate and conservative view of a company's assets.