IAS 2 – Inventories Explained

A Complete Guide by Direct Assist – Chartered Certified Accountants

Published: 3 February 2026

IAS 2 Inventories sets out the accounting treatment for inventories, including how they should be measured, classified, and disclosed in financial statements. The primary objective of the standard is to ensure inventories are carried at an appropriate value and expenses are recognised in the correct accounting period.

Inventories are assets:

• Held for sale in the ordinary course of business

• In the process of production for such sale

• In the form of materials or supplies to be consumed in production or service delivery

Inventories Excluded from IAS 2

IAS 2 does not apply to the following:

• Financial instruments (covered under IAS 32 and IFRS 9)

• Biological assets related to agricultural activity (covered under IAS 41)

IAS 2 also superseded SIC-1 Consistency—Different Cost Formulas for Inventories, providing clearer guidance on inventory valuation.

Measurement of Inventories

Under IAS 2, inventories must be measured at the lower of cost and net realisable value (NRV).

Cost

The cost of inventories includes:

• Purchase costs (net of trade discounts and rebates)

• Conversion costs

• Other costs incurred in bringing inventories to their present location and condition

Net Realisable Value (NRV)

NRV is defined as:

Estimated selling price less estimated costs of completion and costs necessary to make the sale

If NRV falls below cost, the inventory must be written down.

Cost Formulas

According to IAS 2, inventories should be measured using one of the following cost formulas:

• FIFO (First-In, First-Out)

• Weighted Average Cost (WAC)

FIFO Method

FIFO assumes that inventories purchased first are sold first. As a result, closing inventory reflects the most recent purchase prices.

Weighted Average Cost Method

The WAC method calculates an average cost based on:

• The cost of similar items at the beginning of the period, and

• The cost of items purchased or produced during the period

Entities must apply the same cost formula to inventories of a similar nature and use. Different formulas may be used if inventories differ significantly in nature or use.

Costs Excluded from Inventory

The following costs are excluded from inventory valuation and are recognised as expenses when incurred:

• Abnormal waste of materials, labour, or production costs

• Storage costs (unless necessary during production before a further stage)

• Administrative overheads not related to bringing inventories to their present condition

• Selling and distribution costs

Costs Excluded from Inventory

The following costs are excluded from inventory valuation and are recognised as expenses when incurred:

• Abnormal waste of materials, labour, or production costs

• Storage costs (unless necessary during production before a further stage)

• Administrative overheads not related to bringing inventories to their present condition

• Selling and distribution costs

Disclosure Requirements

IAS 2 requires entities to disclose the following in their financial statements:

• Accounting policies adopted for inventory valuation

• Carrying amounts of inventories, classified as raw materials, work in progress, and finished goods

• Inventories measured at fair value less costs to sell

• Amount of inventory write-downs recognised as an expense

• Reversals of inventory write-downs and reasons for such reversals

• Cost of inventories recognised as cost of goods sold

• Inventories pledged as security for liabilities

Final Thoughts

IAS 2 plays a crucial role in ensuring accurate inventory valuation and proper expense recognition. Correct application of the standard improves financial transparency, supports better decision-making, and ensures compliance with IFRS reporting requirements.

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