Part of a series on
Accounting
Constant purchasing power Historical cost Management Tax
Major types Audit Budget Cost Forensic Financial Fund Governmental Management Social Tax
Key concepts Accounting period Accrual Constant purchasing power Economic entity Fair value Going concern Historical cost Matching principle Materiality Revenue recognition Unit of account
Selected accounts Assets Cash Cost of goods sold Depreciation / Amortization (business) Equity Expenses Goodwill Liabilities Profit Revenue
Accounting standards Generally-accepted principles Generally-accepted auditing standards Convergence International Financial Reporting Standards International Standards on Auditing Management Accounting Principles
Financial statements Annual report Balance sheet Cash-flow Equity Income Management discussion Financial statement analysis
Bookkeeping Bank reconciliation Debits and credits Double-entry system FIFO and LIFO Journal Ledger / General ledger Trial balance
Auditing Financial Internal Firms Report Sarbanes–Oxley Act
People and organizations Accountants Accounting organizations Luca Pacioli
Development History Research Positive accounting Sarbanes–Oxley Act
Misconduct Creative Earnings management Error account Hollywood Off-balance-sheet Two sets of books
v t e

International Accounting Standard 2: Inventories (IAS 2) is an international financial reporting standard issued by the International Accounting Standards Board (IASB) that governs the valuation and presentation of inventories.^[1]

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 in the rendering of services.^[2]

The fundamental principle of IAS 2 is that inventories must be measured at the lower of cost and net realisable value (NRV).^[3] Cost comprises all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.^[4]

Costs of conversion include costs directly related to the units of production (e.g., direct labour) and a systematic allocation of fixed and variable production overheads.^[5]

• Variable production overheads: Those indirect costs of production that vary directly, or nearly directly, with the volume of production (e.g., indirect materials such as lubricants and indirect labour).^[6]
• Fixed production overheads: Those indirect costs of production that remain relatively constant regardless of the volume of production (e.g., depreciation and maintenance of factory buildings and equipment, and the cost of factory management and administration).^[7]

The allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities.^[8]

Scenario: An entity purchases raw materials for $10,000. It incurs $2,000 in direct labour and $1,000 in production overheads (e.g., $400 variable lubricants and $600 fixed factory rent) to manufacture finished goods.

Scenario: At year-end, the finished goods (cost $13,000) have a market value of $12,500. Estimated costs to complete the sale (shipping/commissions) are $1,000.

• NRV Calculation: $12,500 - $1,000 = $11,500.
• Write-down Amount: $13,000 (Cost) - $11,500 (NRV) = $1,500.

• Official IAS 2 Standard (IFRS Foundation)
• Summary of IAS 2 by Deloitte