Question

Q3

A) International Accounting Standard 2 aims at addressing different aspects related to inventories maintained by any business. It requires inventories to be stated in the financial accounts at lower of cost or net realizable value as a fundamental principle.

Required:   

IAS 2 requires businesses to disclose certain information relating to the inventories held. Explain in detail the disclosure requirements specified by IAS 2.

Answer 1

Disclosure:

Required disclosures: [IAS 2.36]

• accounting policy for inventories
• carrying amount, generally classified as merchandise, supplies, materials, work in progress, and finished goods. The classifications depend on what is appropriate for the entity
• carrying amount of any inventories carried at fair value less costs to sell
• amount of any write-down of inventories recognised as an expense in the period
• amount of any reversal of a write-down to NRV and the circumstances that led to such reversal
• carrying amount of inventories pledged as security for liabilities
• cost of inventories recognised as expense (cost of goods sold).

IAS 2 acknowledges that some enterprises classify income statement expenses by nature (materials, labour, and so on) rather than by function (cost of goods sold, selling expense, and so on). Accordingly, as an alternative to disclosing cost of goods sold expense, IAS 2 allows an entity to disclose operating costs recognised during the period by nature of the cost (raw materials and consumables, labour costs, other operating costs) and the amount of the net change in inventories for the period). [IAS 2.39] This is consistent with IAS 1 Presentation of Financial Statements, which allows presentation of expenses by function or nature.