Inventory Accounting under IFRS: Measurement, Cost Formulas and Write-Downs

IAS 2 in three rules

• inventories are measured at the lower of cost and net realisable value;
• cost — costs of purchase, costs of conversion (direct labour and production overheads) and costs of bringing inventories to their present location and condition;
• formulas: specific identification for non-interchangeable items, FIFO or weighted average for interchangeable ones; write-downs and losses are an expense of the period.

Write-down example

A batch of goods: cost UZS 120 million, expected selling price UZS 115 million, costs to sell UZS 5 million. Net realisable value is UZS 110 million, and the write-down of UZS 10 million is recognised as an expense of the period.

Who needs this in Uzbekistan

IFRS accounting is mandatory for public interest entities — from 1 January of the year following their inclusion in the Register (Presidential Resolution PP-282) — and for companies that have adopted IFRS voluntarily.

What counts as inventory

Inventories are assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of raw materials and supplies to be consumed in production or in rendering services.

The definition is broader than the everyday meaning: it covers work in progress and materials used to provide services, not just goods in the warehouse.

• goods for resale
• finished goods
• work in progress
• raw materials and supplies

What is included in cost

Cost includes costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present condition and location.

Costs of purchase are the purchase price, import duties, transport and handling, less trade discounts. Recoverable taxes are not included in cost.

What is not included in cost

Abnormal amounts of wasted materials and labour, storage costs unless storage is a necessary stage of the process, administrative overheads that do not contribute to bringing inventories to their present condition, and selling costs.

This is a common error in practice: trying to load everything related to the warehouse into cost overstates inventories and distorts the result for the period.

• abnormal losses
• storage costs for finished inventories
• general administrative expenses
• selling costs

Cost formulas

The standard allows specific identification for items that are not ordinarily interchangeable, and for the rest — first-in, first-out (FIFO) or the weighted average cost formula.

The chosen formula is applied consistently to all inventories of a similar nature and use. It cannot be changed to manage the result for the period.

Net realisable value and write-downs

Net realisable value is the estimated selling price less the costs of completion and the costs to sell. If it is below cost, inventories are written down to it, and the difference is recognised as an expense of the period.

Signs that a write-down is needed: damage, obsolescence, a fall in market prices, higher costs of completion. The assessment is made at each reporting date.

• damaged and spoiled inventories
• obsolete items
• a fall in market prices
• higher costs to bring items to sale

Typical errors

Not assessing inventories for write-down at all is the most common. Inventories sit at full cost for years even though they cannot be sold at that price.

Other errors: including non-production costs in cost, inconsistent application of the cost formula, and no stock count confirming physical existence.

Leader Audit's practice

In an audit of financial statements, inventories are one of the key areas. We check not only the arithmetic but also whether the measurement is justified, whether stock counts are complete and whether the methods applied are correct.

For companies preparing financial statements under international standards, we help build a measurement methodology and prepare the required disclosures.