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Main features of the IFRS 2

Main features of the IFRS 2

Main features of the IFRS 2: Introduction

International Accounting Standard 2 Inventories (IAS 2) replaces IAS 2 Inventories (revised in 1993) and should be applied for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. The Standard also supersedes SIC‑1 Consistency—Different Cost Formulas for Inventories.

Main features of the IFRS 2

Main features of the IFRS 2

Main features of the IFRS 2: Reasons for revising IAS 2

The International Accounting Standards Board developed this revised IAS 2 as part of its project on Improvements to International Accounting Standards. The project was undertaken in the light of queries and criticisms raised in relation to the Standards by securities regulators, professional accountants and other interested parties. The objectives of the project were to reduce or eliminate alternatives, redundancies and conflicts within the Standards, to deal with some convergence issues and to make other improvements.

For IAS 2 the Board’s main objective was a limited revision to reduce alternatives for the measurement of inventories. The Board did not reconsider the fundamental approach to accounting for inventories contained in IAS 2.

Main features of the IFRS 2

The main changes

Objective and scope

The objective and scope paragraphs of IAS 2 were amended by removing the words ‘held under the historical cost system’, to clarify that the Standard applies to all inventories that are not specifically excluded from its scope.

Main features of the IFRS 2: Scope clarification

The Standard clarifies that some types of inventories are outside its scope while certain other types of inventories are exempted only from the measurement requirements in the Standard.

Paragraph 3 establishes a clear distinction between those inventories that are entirely outside the scope of the Standard (described in paragraph 2) and those inventories that are outside the scope of the measurement requirements but within the scope of the other requirements in the Standard.

Main features of the IFRS 2: Scope exemptions

Producers of agricultural and forest products, agricultural produce after harvest and minerals and mineral products

The Standard does not apply to the measurement of inventories of producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value in accordance with well‑established industry practices. The previous version of IAS 2 was amended to replace the words ‘mineral ores’ with ‘minerals and mineral products’ to clarify that the scope exemption is not limited to the early stage of extraction of mineral ores.

Main features of the IFRS 2: Inventories of commodity broker-traders

The Standard does not apply to the measurement of inventories of commodity broker‑traders to the extent that they are measured at fair value less costs to sell.

Objective and scope

The objective and scope paragraphs of IAS 2 were amended by removing the words ‘held under the historical cost system’, to clarify that the Standard applies to all inventories that are not specifically excluded from its scope.

Scope clarification

The Standard clarifies that some types of inventories are outside its scope while certain other types of inventories are exempted only from the measurement requirements in the Standard.

establishes a clear distinction between those inventories that are entirely outside the scope of the Standard (described in paragraph 2) and those inventories that are outside the scope of the measurement requirements but within the scope of the other requirements in the Standard.

Scope exemptions

Producers of agricultural and forest products, agricultural produce after harvest and minerals and mineral products

The Standard does not apply to the measurement of inventories of producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value in accordance with well‑established industry practices. The previous version of IAS 2 was amended to replace the words ‘mineral ores’ with ‘minerals and mineral products’ to clarify that the scope exemption is not limited to the early stage of extraction of mineral ores.

Main features of the IFRS 2″ Inventories of commodity broker-traders

The Standard does not apply to the measurement of inventories of commodity broker‑traders to the extent that they are measured at fair value less costs to sell.

Main features of the IFRS 2: Disclosure

The financial statements shall disclose:

(a) the accounting policies adopted in measuring inventories, including the cost formula used;

(b)  the total carrying amount of inventories and the carrying amount in classifications appropriate to the entity.

(c) the carrying amount of inventories carried at fair value less costs to sell.

(d) the amount of inventories recognised as an expense during the period.

(e)the amount of any write‑down of inventories recognised as an expense.

(f)the amount of any reversal of any write‑down that is recognised as a reduction in the amount of inventories recognised as expense .

(g) the circumstances or events that led to the reversal.

(h) the carrying amount of inventories pledged as security for liabilities.

Information about the carrying amounts held in different classifications of inventories and the extent of the changes in these assets is useful to financial statement users. Common classifications of inventories are merchandise, production supplies, materials, work in progress and finished goods. The inventories of a service provider may be described as work in progress.

Main features of the IFRS 2

The amount of inventories recognised as an expense during the period, which is often referred to as cost of sales, consists of those costs previously included in the measurement of inventory that has now been sold and unallocated production overheads and abnormal amounts of production costs of inventories. The circumstances of the entity may also warrant the inclusion of other amounts, such as distribution costs.

Main features of the IFRS 2

Some entities adopt a format for profit or loss that results in amounts being disclosed other than the cost of inventories recognised as an expense during the period. Under this format, an entity presents an analysis of expenses using a classification based on the nature of expenses. In this case, the entity discloses the costs recognised as an expense for raw materials and consumables, labour costs and other costs together with the amount of the net change in inventories for the period.

Main features of the IFRS 2

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