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Financial Reporting · Inventories and agriculture

IAS 2 Inventories: Scope and Measurement Explained

Updated 11 October 2026 · Fact-checked

IAS 2 requires inventories to be measured at the lower of cost and net realisable value (NRV). Cost includes purchase, conversion and other costs of bringing items to their present location and condition. NRV is estimated selling price less estimated costs to complete and sell. Compare cost and NRV item by item, and write down to the lower figure.

Understand IAS 2 Inventories: Scope and Measurement

Inventories are assets held for sale in the ordinary course of business, assets in the process of production for sale, or materials and supplies to be used in production or in providing services. So raw materials, work in progress (WIP) and finished goods are all inventories.

IAS 2 does not apply to everything held for sale. Its scope excludes financial instruments (covered by IFRS 9 and IAS 32). It also excludes biological assets related to agricultural activity and agricultural produce at the point of harvest (covered by IAS 41). After harvest, the produce is inventory under IAS 2, and its fair value less costs to sell at the point of harvest is its cost. Work in progress arising under contracts with customers is also outside IAS 2, as it falls under IFRS 15. Separately, IAS 2's measurement requirements do not apply to commodity broker-traders, or to producers of agricultural and forest products after harvest, who measure inventories at fair value less costs to sell. At FR level, focus on the main rule.

The main rule is prudence in action. Inventories are measured at the lower of cost and net realisable value. You do not want to carry an asset above the amount you expect to recover from selling it. If NRV is below cost, you write inventory down to NRV and charge the loss to profit or loss. You never write inventory up above cost.

Cost has three parts. Costs of purchase include the purchase price, import duties and non-recoverable taxes, and transport and handling to bring the goods to you, less trade discounts and rebates. Costs of conversion include direct labour and a systematic allocation of production overheads, with fixed overheads allocated on the basis of normal capacity. Other costs are included only if they bring the inventory to its present location and condition.

Some costs are excluded and expensed when incurred: abnormal waste of materials, labour or other production costs; storage costs (unless needed in the production process before a further stage); administrative overheads that do not contribute to bringing inventories to their present location and condition; and selling costs. NRV is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.

Key rules to remember

Measurement rule
Inventory = lower of (cost, NRV)
Apply it item by item or to groups of similar items, not to the total inventory as one figure.
Net realisable value
NRV = estimated selling price − estimated costs to complete − estimated selling costs
Use costs still to be incurred only. Costs already incurred are in cost.
Cost of inventory
Cost = purchase costs + conversion costs + other costs to bring to present location and condition
Purchase costs are net of trade discounts and rebates.
Fixed overhead absorption
Fixed overhead per unit = fixed production overheads ÷ normal capacity
In a low-production period, do not increase the rate per unit. Unallocated overhead is an expense. In a high-production period, reduce the rate so inventory is not above cost.
Write-down
Write-down = cost − NRV (only where NRV < cost)
Debit cost of sales (or profit or loss), credit inventory.

How to solve IAS 2 Inventories: Scope and Measurement questions

Use this method for any IAS 2 measurement question, whether objective test or written.

  1. 1Identify what is inventory. Check the item is held for sale, in production, or a material to be consumed, and not covered by another standard.
  2. 2Build cost for each item. Start with purchase price, deduct trade discounts and rebates, add import duties, non-recoverable taxes and carriage inwards.
  3. 3Add conversion costs if the entity makes the goods: direct labour and production overheads based on normal capacity.
  4. 4Exclude abnormal waste, storage (unless necessary in production), administration and selling costs, and recoverable sales taxes.
  5. 5Calculate NRV: selling price less costs still to complete and costs to sell.
  6. 6Compare cost and NRV for each item or group of similar items and take the lower.
  7. 7Total the carrying amounts and calculate any write-down. Show the entry to profit or loss if needed.

Quickest way: Cost versus NRV in three lines

When to use it: Use this for Section A and OT case questions where you must pick the carrying amount quickly.

  1. Write cost on one line, with only costs that bring the item to its location and condition.
  2. Write NRV below it: selling price minus remaining costs to complete and sell.
  3. Circle the lower figure. If the question asks for the write-down, subtract the lower figure from cost.

Common mistakes in IAS 2 Inventories: Scope and Measurement

  • Including selling costs or storage costs in cost.

    They feel like costs of the inventory because they relate to the goods.

    Fix: Only costs that bring inventory to its present location and condition are in cost. Selling and administration costs are expensed. Selling costs are deducted in NRV instead.

  • Forgetting to deduct costs to complete when calculating NRV.

    Students take the selling price less selling costs only.

    Fix: For WIP or partly finished goods, always deduct the costs still to be incurred to finish, as well as the selling costs.

  • Comparing total cost with total NRV.

    It looks quicker and gives one answer.

    Fix: Compare line by line, or by groups of similar items. A gain on one item must not offset a loss on another.

  • Writing inventory up above cost when NRV is higher.

    Students think of fair value or revaluation.

    Fix: Inventory is never carried above cost under the lower of cost and NRV rule. If NRV exceeds cost, keep cost.

  • Including abnormal waste or idle capacity costs in cost.

    These are real production costs, so they seem to belong in cost.

    Fix: Abnormal losses are expensed in the period. Fixed overheads are absorbed using normal capacity only.

  • Including recoverable sales tax in the purchase price.

    The invoice total is used without checking.

    Fix: Only non-recoverable taxes are part of cost. If the entity can reclaim the tax, exclude it.

Worked examples

Example 1

At the year end, a company holds three products. Cost and NRV information: Product A: cost $12,000, selling price $15,000, selling costs $1,000. Product B: cost $9,000, selling price $8,000, selling costs $500. Product C (partly finished): cost $6,000, selling price $10,000, further costs to complete $2,500, selling costs $700. Calculate the carrying amount of inventories and the write-down.

Show the solution
  1. Product A: NRV = 15,000 − 1,000 = $14,000. Cost is $12,000. Lower is cost, $12,000.
  2. Product B: NRV = 8,000 − 500 = $7,500. Cost is $9,000. Lower is NRV, $7,500. Write-down is $1,500.
  3. Product C: NRV = 10,000 − 2,500 − 700 = $6,800. Cost is $6,000. Lower is cost, $6,000.
  4. Total carrying amount = 12,000 + 7,500 + 6,000 = $25,500.
  5. Total cost is 12,000 + 9,000 + 6,000 = $27,000, so the write-down is 27,000 − 25,500 = $1,500.

Answer: Inventories are carried at $25,500. The write-down of $1,500 relates to Product B and is charged to profit or loss.

Example 2

A manufacturer produced 8,000 units. Costs: materials $40,000 (including $2,000 of abnormal waste), direct labour $24,000, variable production overheads $8,000, fixed production overheads $30,000 (based on normal capacity of 10,000 units), storage of finished goods $3,000, and administration costs $12,000. At the year end 1,000 units remain unsold, and the estimated NRV is $14 per unit, after deducting the estimated costs to sell. Calculate the carrying amount of the closing inventory.

Show the solution
  1. Materials in cost = 40,000 − 2,000 abnormal waste = $38,000.
  2. Fixed overhead absorbed = 30,000 × (8,000 ÷ 10,000) = $24,000. The remaining $6,000 is expensed because production was below normal capacity.
  3. Total cost of production = 38,000 + 24,000 + 8,000 + 24,000 = $94,000.
  4. Storage of finished goods and administration are excluded.
  5. Cost per unit = 94,000 ÷ 8,000 = $11.75.
  6. Cost of 1,000 units = $11,750. NRV = 1,000 × 14 = $14,000, which is already net of selling costs.
  7. Lower of cost and NRV is cost, $11,750.

Answer: Closing inventory is carried at $11,750 (cost per unit $11.75, which is below NRV of $14 per unit net of selling costs).

Exam tips

  • In OT questions, read what is asked: carrying amount of inventory, the write-down, or the effect on profit. They need different final lines.
  • Underline every cost in the scenario and mark it as included or excluded before calculating. Distractors are often storage, selling or administration costs.
  • For fixed overheads, check whether actual production is below normal capacity. If so, absorb only on actual units.
  • In Section C, show cost and NRV for each item in a small table-like list, then state the lower figure. Method marks are available even if one figure is wrong.
  • Check whether the question gives costs to complete. If it does, it is almost certainly an NRV test for WIP.

Practice questions from Inventories and agriculture

IAS 2 Inventories: Scope and Measurement in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

IAS 2 Inventories: Scope and Measurement: frequently asked questions

What is the lower of cost and NRV rule in IAS 2?

Inventories are measured at the lower of their cost and net realisable value. If NRV is lower than cost, you write the inventory down to NRV and recognise the loss in profit or loss. You never increase inventory above cost.

How do you calculate net realisable value for ACCA FR?

Take the estimated selling price in the ordinary course of business. Deduct the estimated costs to complete the item and the estimated costs necessary to make the sale. The result is NRV.

What costs are included in inventory valuation under IAS 2?

Costs of purchase (net of trade discounts and rebates, including import duties and non-recoverable taxes and carriage inwards), costs of conversion (direct labour and production overheads on normal capacity) and other costs to bring inventory to its present location and condition. Abnormal waste, storage, administration and selling costs are excluded.

Should I compare cost and NRV for total inventory or each item?

Compare item by item, or by groups of similar items where that is appropriate. Comparing total cost with total NRV would let gains on some items hide losses on others, which IAS 2 does not allow.