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Chapter 5

Valuation of inventory

IAS 2 Inventories says that ‘inventory shall be measured at the lower of cost and
net realisable value’ (IAS 2 para 9).

The lower of:

Net realisable
Cost
value

All expenditure This includes the cost
Revenue expected to be
incurred to bring the of purchase, material
product or service to costs, import duties, earned in the future when
its present location freight inwards and the goods are sold, less
and condition. cost of conversion. any further costs to sell

Cost includes 'all costs of purchase, costs of conversion and other costs
incurred in bringing the inventories to their current location and condition' (IAS
2, para 10).

According to IAS 2 Inventories, the following costs should be excluded from the cost
of inventories: selling costs, storage costs, costs of abnormal wastage and
administrative overheads.

NRV – is the estimated selling price in the ordinary course of business, less the
estimated cost of completion and the estimated costs necessary to make the sale.

IAS 1 Presentation of Financial Statements requires that entities
disclose the accounting policies adopted in preparing the financial
statements including those used to account for inventory

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