FINANCIAL REPORTING 3
IAS 2 STUDY NOTES
Inventories
Beginner-Friendly | Definitions · Cost Formulas · NRV · Exam
Technique
Level 3 Accounting · Based on IASB IAS 2 · Assumed Prior Knowledge
,📖 WHAT'S INSIDE THESE NOTES
Section Topic
SECTION 1 Background & Scope — What is IAS 2 and why does it exist?
SECTION 2 Key Definitions — Inventories, NRV, Cost
SECTION 3 What is Included in the Cost of Inventory?
SECTION 4 Cost Formulas — FIFO vs Weighted Average
SECTION 5 Net Realisable Value (NRV) — The Lower of Cost and NRV Rule
SECTION 6 Write-Down of Inventory and Reversals
SECTION 7 Recognition as an Expense
SECTION 8 IAS 2 and Deferred Tax (IAS 12 Link)
SECTION 9 Disclosure Requirements
SECTION 10 Exam Technique & Standard-Flagging Guide
SECTION 11 Quick Revision Cheat Sheet & Worked Examples
, SECTION 1: BACKGROUND & SCOPE
1.1 What is IAS 2?
IAS 2 – Inventories prescribes the accounting treatment for inventories. It tells you:
• How to MEASURE inventory (what cost to record)
• Which COST FORMULAS are permitted (FIFO or Weighted Average — LIFO is BANNED
under IFRS)
• When to WRITE DOWN inventory to a lower value (the NRV rule)
• When to RECOGNISE inventory as an EXPENSE in profit or loss
IAS 2 Full Title Inventories
1.2 Scope — What Qualifies as Inventory?
📖 DEFINITION — IAS 2.6
Inventories are assets:
(a) Held for SALE in the ordinary course of business;
(b) In the PROCESS OF PRODUCTION for such sale; OR
(c) In the form of MATERIALS OR SUPPLIES to be consumed in the production process
or in the rendering of services.
📌 EXAMPLES OF INVENTORIES
Manufacturing company:
→ RAW MATERIALS: steel, fabric, plastic (used in making products)
→ WORK IN PROGRESS (WIP): partially completed goods on the factory floor
→ FINISHED GOODS: completed products ready for sale
Retail company:
→ MERCHANDISE: goods bought for resale (e.g. clothing, electronics, food)
Service company:
→ SUPPLIES: cleaning materials, stationery used in providing services
→ WIP: partially delivered service jobs where costs have accumulated
Property developer:
→ LAND AND BUILDINGS held for sale in ordinary course of business
(NOT investment property — the intent is sale, not rental income/capital appreciation)
IAS 2 STUDY NOTES
Inventories
Beginner-Friendly | Definitions · Cost Formulas · NRV · Exam
Technique
Level 3 Accounting · Based on IASB IAS 2 · Assumed Prior Knowledge
,📖 WHAT'S INSIDE THESE NOTES
Section Topic
SECTION 1 Background & Scope — What is IAS 2 and why does it exist?
SECTION 2 Key Definitions — Inventories, NRV, Cost
SECTION 3 What is Included in the Cost of Inventory?
SECTION 4 Cost Formulas — FIFO vs Weighted Average
SECTION 5 Net Realisable Value (NRV) — The Lower of Cost and NRV Rule
SECTION 6 Write-Down of Inventory and Reversals
SECTION 7 Recognition as an Expense
SECTION 8 IAS 2 and Deferred Tax (IAS 12 Link)
SECTION 9 Disclosure Requirements
SECTION 10 Exam Technique & Standard-Flagging Guide
SECTION 11 Quick Revision Cheat Sheet & Worked Examples
, SECTION 1: BACKGROUND & SCOPE
1.1 What is IAS 2?
IAS 2 – Inventories prescribes the accounting treatment for inventories. It tells you:
• How to MEASURE inventory (what cost to record)
• Which COST FORMULAS are permitted (FIFO or Weighted Average — LIFO is BANNED
under IFRS)
• When to WRITE DOWN inventory to a lower value (the NRV rule)
• When to RECOGNISE inventory as an EXPENSE in profit or loss
IAS 2 Full Title Inventories
1.2 Scope — What Qualifies as Inventory?
📖 DEFINITION — IAS 2.6
Inventories are assets:
(a) Held for SALE in the ordinary course of business;
(b) In the PROCESS OF PRODUCTION for such sale; OR
(c) In the form of MATERIALS OR SUPPLIES to be consumed in the production process
or in the rendering of services.
📌 EXAMPLES OF INVENTORIES
Manufacturing company:
→ RAW MATERIALS: steel, fabric, plastic (used in making products)
→ WORK IN PROGRESS (WIP): partially completed goods on the factory floor
→ FINISHED GOODS: completed products ready for sale
Retail company:
→ MERCHANDISE: goods bought for resale (e.g. clothing, electronics, food)
Service company:
→ SUPPLIES: cleaning materials, stationery used in providing services
→ WIP: partially delivered service jobs where costs have accumulated
Property developer:
→ LAND AND BUILDINGS held for sale in ordinary course of business
(NOT investment property — the intent is sale, not rental income/capital appreciation)
