PAS 2 Summary

Objective of PAS 2
The objective of PAS 2 is to endorse the accounting treatment for inventories. It provides
direction for deciding the fetched of inventories and for subsequently recognizing a cost,
counting any write-down to net feasible esteem. It also provides direction on the cost formulas
that are utilized to allot costs to inventories.
Scope
Inventories incorporate assets held for sale within the conventional course of business (finished
products), assets within the production process for a sale within the ordinary course of trade
(work in process), and materials and supplies that are consumed in production (raw materials).
[PAS 2.6]
In any case, PAS 2 avoids certain inventories from its scope: [PAS 2.2] I. work-in-process
emerging under development contracts (see PAS 11) II. financial instruments (see PAS 39) III.
organic resources related to agrarian activity and agrarian produce at the point of harvest (PAS
41).
Too, whereas the following are inside the scope of the standard, PAS 2 does not apply to the
estimation of inventories held by [PAS 2.3] producers of agricultural and forest items, rural
create after collect and minerals and mineral items, to the degree that they are measured at net
realizable value (above or underneath fetched) in understanding with well-established practices
in those businesses. When such inventories are measured at net realizable esteem, changes in that
esteem are recognized in benefit or misfortune within the period of the alter. product brokers and
merchants who degree their inventories at reasonable esteem fewer costs to offer. When such
inventories are measured at reasonable esteem less costs to offer, changes in reasonable esteem
fewer costs to offer are recognized in profit or misfortune within the period of the change.
Fundamental principle of PAS 2
Inventories are required to be stated at the lower of cost and net realizable value (NRV). [PAS
2.9}
Measurement of Inventories
Cost should include all: [PAS 2.10] costs of purchase (including taxes, transport, and handling)
net of trade discounts received costs of conversion (including fixed and variable manufacturing
overheads) and other costs incurred in bringing the inventories to their present location and
condition PAS 23 Borrowing Costs identifies some limited circumstances where borrowing costs
(interest) can be included in cost of inventories that meet the definition of aqualifying asset.
[PAS 2.17 and PAS 23.4] Inventory cost should not include: [PAS 2.16 and 2.18] abnormal
waste storage costs administrative overheads unrelated to production selling costs foreign
exchange differences arising directly on the recent acquisition of inventories invoiced in a
foreign currency interest cost when inventories are purchased with deferred settlement terms.
The standard cost and retail methods may be used for the measurement of cost, provided that the
results approximate actual cost.
[PAS 2.21-22] For inventory items that are not interchangeable, specific costs are attributed to
the specific individual items of inventory.
[PAS 2.23] For items that are interchangeable, PAS 2 allows the FIFO or weighted average cost
formulas.
[PAS 2.25] The LIFO formula, which had been allowed prior to the2003 revision of PAS 2, is no
longer allowed.
The same cost formula should be used for all inventories with similar characteristics as to their
nature and use to the entity.
For groups of inventories that have different characteristics, different cost formulas may be
justified.
Write-Down to Net Realisable Value
NRV is the estimated selling cost within the ordinary course of trade, less the estimated cost of
completion and the estimated costs fundamental to form the sale. [IAS 2.6] Any write-down to
NRV ought to be recognized as a cost within the period in which the write-down happens. Any
inversion ought to be recognized within the wage explanation within the period in which the
inversion happens. [PAS 2.34]
Expense Recognition
PAS 18 Revenue addresses income acknowledgment for a lot of products. When inventories are
sold and income is perceived, the carrying sum of those inventories is perceived as a cost
(regularly called cost-of-goods sold). Any write-down to NRV and any stock misfortunes are too
perceived as an expense when they happen. [PAS 2.34]
Disclosure
Required Disclosures: [PAS 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).