Exception to the lower of cost and net realizable value rule in IAS 2-Inventories 14/09/13 23:06

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Exception to the lower of cost and net

realizable value rule in IAS 2-Inventories Follow 516,486

Three techtips on IAS 2-Inventories:- (a) Exception to the

lower of cost and net realizable value rule in IAS 2; (b)
Inventory cost formula consistency requirement; and (c). Can
exchange differences on acquisition of inventories be
capitalized?

Exception to the lower of cost and net realizable value rule

IAS 2 states that inventories shall be measured at the lower of cost and net realizable value.
The standard further states that this practice of writing inventories down below cost to their net
realizable values is in line and consistent with the principle that assets should not be carried in
excess of amounts expected to be realized from their sale or use. The same principle applies
to non-current assets that are reviewed and tested for impairment in order to ensure they are
not carried above their recoverable amounts.

However, without prejudice to the above rule, IAS 2 states that materials (raw materials for
instance) and other supplies held for use in the production of inventories (e.g. finished goods or
other forms of materials) are not written down below cost if the finished products in which they
will be incorporated are expected to be sold at or above cost.

This is a check that must be carried out by entities before writing down materials and supplies
that form input into other production stages in order to comply with the requirements of IAS 2.

Inventory cost formula consistency

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Exception to the lower of cost and net realizable value rule in IAS 2-Inventories 14/09/13 23:06

IAS 2 requires that an entity uses the same cost formula, e.g. FIFO or weighted average, for all
inventories that have a similar nature and use to the entity. This is a new incorporation into the
standard. The requirement was hitherto contained in SIC-1- Consistency Different Cost
formulas for Inventories. With the incorporation of this requirement into IAS 2, SIC 1 is now
superseded.

Can exchange differences on acquisition of inventory be capitalized as part of the cost

of purchase of the inventory?
IAS 2 does not permit exchange differences arising directly on the recent acquisition of
inventories invoiced in a foreign currency to be included in the costs of purchase of inventories.
This is a change from the previous version of IAS 2 to enable consistency with the new
requirement of IAS 21 (The Effects of Changes in Foreign Exchange Rates) that has
eliminated the alternative treatment of capitalizing certain exchange differences.

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Exception to the lower of cost and net realizable value rule in IAS 2-Inventories 14/09/13 23:06

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