This is an area that obviously impacts both income statement and statement of financial position (balance sheet), but we will address it within the income statement chapter. IAS 2 Inventories, as its number implies, is a venerable standard that was first issued in 1975, even if it has been revised extensively in 1993 and was also reviewed in the IASB’s 2003 improvements to their inherited standards, when some options were removed. The standard does not apply to agricultural products or construction contracts measured under IAS 11, nor does it apply to commodity brokers who measure inventories at fair value less costs to sell.
The standard specifies that inventories are held at the lower of cost or net realizable value. The standard goes into some detail as to what costs should be incorporated into the carrying value of inventory, and this is sometimes analogized to in other areas where costs are capitalized. Where costs have to be allocated to individual units by a formula, the standard mandates only First In First Out (FIFO) and weighted average. Last in First Out (LIFO) is not permitted, which might be a problem for US companies if they adopted IFRS, as it is allowed for tax purposes in the US.
The standard specifies that inventories are held at the lower of cost or net realizable value
Net realizable value is defined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make ...