IAS 2 : Inventories"

IAS 2, titled "Inventories," is an International Accounting Standard issued by the International Accounting Standards Board (IASB). IAS 2 provides guidance on the accounting treatment and disclosure of inventories (also known as stocks) held by entities in the ordinary course of business. Inventories include raw materials, work in progress, and finished goods.

Key points and objectives of IAS 2 include:

1. Objective: The primary objective of IAS 2 is to prescribe the accounting treatment for inventories and to ensure that inventories are measured at the lower of cost and net realizable value. This standard aims to ensure that inventories are recognized as assets and are reported at an amount that does not exceed their recoverable amount.

2. Measurement: IAS 2 requires inventories to be measured at cost. The standard provides guidance on how to determine the cost of inventories, which includes the purchase price, conversion costs, and other costs incurred in bringing the inventories to their present location and condition.

3. Net Realizable Value: If the net realizable value (the estimated selling price less estimated costs of completion and selling expenses) of inventories is lower than their cost, IAS 2 requires inventories to be written down to the lower value.

4. Cost Formulas: IAS 2 permits the use of different cost formulas for measuring inventories, including the First-In-First-Out (FIFO) method, Weighted Average Cost method, and Specific Identification method. Entities must consistently apply the chosen cost formula.

5. Disclosure: The standard prescribes disclosure requirements related to inventories, including the accounting policies used, carrying amounts, carrying amounts of inventories pledged as security, and circumstances where carrying amounts exceed their net realizable value.

6. Exemptions: IAS 2 provides exemptions for certain types of inventories, such as agricultural produce, and work in progress arising from the construction of assets for the entity's own use.

7. Consistency: Entities are required to be consistent in their cost formulas for similar types of inventories and make appropriate disclosures if they change their cost formula.

IAS 2 ensures that inventories are recognized on the balance sheet as assets and are measured at an amount that reflects their economic value. This standard helps to prevent overstatement of assets and understatement of costs, leading to more transparent financial reporting.

IAS 2 applies to all entities that prepare financial statements in accordance with International Financial Reporting Standards (IFRS). It is particularly relevant for manufacturing, trading, and service companies that hold inventories as part of their normal business operations.