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Introduction
There are mainly two accounting standards: principle-based and rule-based in the
accounting system. This paperwork will chose one regulation in International Accounting
Standard, which is covered the regulations on inventory. After the brief summary of IAS 2,
there will be a discuss about the IAS 2 characteristics.
Summary of IAS 2
In summary, the objective of IAS 2 is to prescribe the accounting treatment for inventories.
It provides guidance not only for determining the cost of inventories and for subsequently
recognising an expense, involving any write-down to net realisable value, but also on the
cost formulas that are used to assign costs to inventories.
The definition of Inventories in IAS 2 includes work in process (assets in the production
process for sale in the ordinary course of business), finished goods (assets held for sale in
the ordinary course of business) and raw materials (materials and supplies that are
consumed in production). [IAS 2.6]
As the fundamental Principle of IAS 2, Inventories should be measured at the lower of cost
and net realisable value (which is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs necessary to make
the sale). [IAS 2.9]
The measurement of cost of inventories shall comprise all costs of purchase (including
taxes, transport, and handling), costs of conversion (including fixed and variable
manufacturing overheads) and other costs incurred in bringing the inventories to their
present location and condition. [IAS2.10]
The cost of inventories shall be assigned by using the first-in, first-out (FIFO) or weighted
average cost formula for items that are interchangeable. The LIFO formula, which had
been allowed prior to the 2003 revision of IAS 2, is no longer allowed. However, for
inventory items that are not interchangeable and goods or services produced and
segregated for specific projects, specific costs are attributed to the specific individual items
of inventory. [IAS 2.23]
As IAS 2 required, an entity shall use the same cost formula for all inventories having a
similar nature and use to the entity. For inventories with a different nature or use, different
cost formulas may be justified. [IAS 2.25]
Finally, as addressed in IAS 18 revenue recognition for the sale of goods, when inventories
are sold, the carrying amount of thoseinventories shall be 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 losses of inventories shall be recognised as an
