FRS 2 provides guidance on the determination of cost of inventories and its subsequent recognition as an expense, any write down to net realizable value.
FRS 2 applies to all inventories except for:
a) WIP under construction contracts;
b) Financial instruments; and
c) Biological assets related to agricultural activity produce at the point of harvest.
Inventories are measured at the lower of cost and net realisable value (NRV).
- NRV is the estimated selling price in the ordinary course of business less estimated costs of completion and costs necessary to make the sale.
- Cost of inventories comprise of cost of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
Three methods of costing inventories are specified under paragraph 23-27 of FRS 2.
i) Specific identification of costs method
ii) First-In, First-Out (FIFO) costs method
iii) Weighted average costs method
FRS 2 requires that the amount of write down of inventories to NRV is recognised as an expense in the period the write down or loss occurs. Any reversals of the write down, as a result of increase in NRV, is recognised as a reduction in amount of inventories recognized as an expense in the period the reversal occurs.
FRS 2 also specifies the disclosures required of inventories.
Source – ICPAS ePublication