📖 Overview
This standard prescribes the accounting treatment for inventories, including cost determination, expense recognition, and any write-down to net realizable value. Inventories include goods purchased, raw materials, work in progress, and finished goods. The standard prohibits LIFO and permits FIFO or weighted average cost.
🎯 Scope
This standard applies to all types of inventory, including:
- Goods purchased for resale (merchandise).
- Raw materials and consumables used in production.
- Work in progress.
- Finished goods ready for sale.
**Does not apply to:**
- Construction contracts (IFRS 15).
- Financial instruments (IFRS 9).
- Agricultural products (IAS 41).
⚙️ Key Principles
1. **Inventory Measurement**: Inventory is measured at the lower of cost or net realizable value (NRV).
2. **Net Realizable Value (NRV)**: Estimated selling price in the ordinary course of business less estimated costs of completion and estimated costs necessary to make the sale.
3. **Cost Formulas**:
- FIFO (First-In, First-Out): Assumes oldest units are sold first.
- Weighted Average Cost.
4. **LIFO Prohibited**: The LIFO (Last-In, First-Out) method is prohibited under IFRS.
📏 Measurement
**Cost of inventory includes:**
- Purchase cost (purchase price + import duties + transport + handling).
- Conversion costs (direct labor + direct manufacturing overhead).
- Other costs to bring inventory to its present location and condition.
**Cost excludes:**
- Abnormal costs (abnormal waste).
- Storage costs (unless necessary for production).
- General administrative expenses.
- Selling costs.
✅ Recognition
Inventory is recognized as an expense (cost of goods sold) when the goods are sold. Any write-down of inventory to net realizable value is recognized as an expense in the period the write-down occurs. Any reversal of a write-down (up to the original cost) is recognized in subsequent periods.
📊 Presentation
Inventory is presented as a separate line item on the Statement of Financial Position within current assets. The notes disclose:
- Accounting policies for inventory valuation (FIFO or weighted average).
- Total carrying amount of inventory.
- Carrying amount of inventory carried at net realizable value.
- Amount of any write-down or reversal.
📝 Disclosure Requirements
Disclosures required:
- Accounting policies for inventory valuation (including cost formula used).
- Total carrying amount of inventory classified by type (raw materials, WIP, finished goods, merchandise).
- Amount of inventory recognized as expense during the period.
- Amount of any write-down and reversal.
- Circumstances that led to the reversal.
- Inventory pledged as security for liabilities.
🔗 Related Standards
IAS 1 (Presentation of Financial Statements), IAS 18 (Revenue - superseded), IFRS 15 (Revenue)