IAS 2 INVENTORIES

OBJECTIVE
IAS 2 prescribes the accounting treatment for inventories.  
In summary, IAS 2 says the following:
Inventory shall be valued at the LOWER of:
 Cost                            or          Net realisable value
Cost
IAS 2 states that ‘cost’ should comprise:
• the cost of purchase;
• the costs of conversion; and
• other costs.
‘Other costs’ should only be recognised as those costs that have been incurred in bringing the
inventories to their present location and condition.
Valuation
IAS 2 prescribes two possible valuation methods for inventories.  An entity can adopt either:
• the first-in first-out basis (FIFO); or
• a weighted average basis.
Entities are not permitted to use a last-in first-out (LIFO) basis of valuation.
Net Realisable Value
Net realisable value is the estimated selling price in the ordinary course of business, less the
estimate costs of completion and the estimated costs necessary to make the sale.