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How inventory is measured and reported under IAS 2 and ASC 330

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Inventory represents assets held for sale, in production, or in the form of materials to be consumed in production or service delivery. Under IAS 2 (Inventories) and US GAAP (ASC 330 – Inventory), inventory must be measured at the lower of cost and net realizable value (NRV) (IFRS) or lower of cost and market (LCM) (GAAP). The objective is to ensure that inventory is not carried above the amount expected to be realized from its sale or use, reflecting economic reality and avoiding overstatement of assets.

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How inventory cost is determined.

Inventory cost includes all costs of purchase, conversion, and other costs incurred to bring the inventory to its present location and condition.

Components under both frameworks:

  • Cost of purchase: purchase price, import duties, non-recoverable taxes, transport, handling, and other directly attributable costs, less trade discounts.

  • Cost of conversion: direct labor, direct materials, and systematic allocation of fixed and variable production overheads.

  • Other costs: may include design or development costs for specific orders, if directly attributable.

Under IAS 2 and ASC 330, administrative and selling costs are excluded unless directly attributable to bringing inventory to its current condition.

Example — basic journal entry for purchased goods:

  • Debit: Inventory – Raw Materials 300,000

  • Credit: Accounts Payable 300,000

When used in production:

  • Debit: Work in Progress 300,000

  • Credit: Inventory – Raw Materials 300,000

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Cost formulas under IFRS and US GAAP.

IAS 2 permits:

  • Specific identification (for unique items).

  • FIFO (First In, First Out).

  • Weighted-average cost.LIFO is prohibited under IFRS.

ASC 330 permits:

  • Specific identification, FIFO, Average, and LIFO (Last In, First Out).

LIFO remains common in the U.S. for tax conformity reasons but often produces lower ending inventory and higher cost of sales in periods of inflation.

Example – cost comparison:

Method

Units sold

Cost per unit

COGS (USD)

Ending Inventory (USD)

FIFO

600

10 → 11 → 12

6,400

3,600

Weighted Average

600

Avg = 11

6,600

3,400

LIFO (GAAP only)

600

12 → 11 → 10

6,800

3,200

Under IFRS, only FIFO or average would be acceptable.

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Measurement at the lower of cost and NRV or market.

IFRS (IAS 2):NRV = estimated selling price – estimated completion and selling costs.

US GAAP (ASC 330):Market = current replacement cost, subject to ceiling (NRV) and floor (NRV – normal profit margin).

Example – write-down (IFRS or GAAP):Inventory cost 100,000; NRV 90,000.

  • Debit: Inventory Write-down Expense 10,000

  • Credit: Inventory 10,000

Subsequent recovery:

  • IFRS: reversal permitted up to original cost if NRV increases.

  • US GAAP: reversal prohibited (inventory carried at written-down cost).

Reversal example (IFRS):NRV increases from 90,000 to 95,000 (cost 100,000).

  • Debit: Inventory 5,000

  • Credit: Reversal of Write-down 5,000

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Cost allocation and overhead absorption.

Both frameworks require allocation of fixed manufacturing overhead based on normal capacity. Abnormal production levels result in unallocated overhead recognized immediately as expense.

Example – allocation journal:Fixed overhead 400,000; normal capacity 20,000 units = 20 per unit.If only 15,000 units produced, allocated = 300,000; unallocated = 100,000 expensed.

  • Debit: Work in Progress 300,000

  • Debit: Manufacturing Overhead Expense 100,000

  • Credit: Overhead Control 400,000

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Inventory categories and presentation.

IFRS: inventories classified by nature:

  • Raw materials.

  • Work in progress.

  • Finished goods.

  • Merchandise.

  • Production supplies.

US GAAP: similar categories, though presentation may follow functional grouping (e.g., current assets section).

Example balance sheet excerpt:

Current Assets

Amount (USD)

Cash and Cash Equivalents

240,000

Accounts Receivable

410,000

Inventory

520,000

Prepaid Expenses

45,000

Total Current Assets

1,215,000

Disclose inventory policies, cost formulas, and total carrying amount by classification.

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Comparative table: IAS 2 vs ASC 330.

Aspect

IFRS (IAS 2)

US GAAP (ASC 330)

Measurement

Lower of cost and NRV

Lower of cost and market (RC within NRV ceiling/floor)

Allowed methods

FIFO, weighted-average

FIFO, weighted-average, LIFO

LIFO

Prohibited

Permitted

Reversal of write-down

Allowed up to original cost

Prohibited

Overhead allocation

Based on normal capacity

Same

Biological or agricultural inventory

Excluded (IAS 41)

Similar exclusions

Disclosure focus

Carrying amount, write-down reversals, cost formula

Carrying amount, LIFO reserve, valuation method

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Journal entries for common transactions.

1) Purchase of inventory:

  • Debit: Inventory 120,000

  • Credit: Accounts Payable 120,000

2) Issue to production:

  • Debit: Work in Progress 120,000

  • Credit: Inventory 120,000

3) Cost of goods sold on sale:

  • Debit: Cost of Goods Sold 250,000

  • Credit: Inventory 250,000

4) Write-down for NRV decline:

  • Debit: Inventory Write-down 15,000

  • Credit: Inventory 15,000

5) Reversal (IFRS only):

  • Debit: Inventory 5,000

  • Credit: Reversal of Impairment 5,000

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Impact on financial performance and ratios.

Inventory accounting affects both the income statement and balance sheet:

  • Gross margin — lower under LIFO or when NRV declines.

  • Current ratio — sensitive to valuation adjustments.

  • Inventory turnover — affected by costing method and write-downs.

  • Taxable income (US) — LIFO yields deferral benefits during inflation.

Analysts frequently adjust for LIFO reserve to restate financials on a FIFO basis for comparability across IFRS and GAAP reporters.

Example – LIFO reserve disclosure (GAAP):| FIFO inventory | 600,000 || LIFO reserve | (80,000) || LIFO inventory | 520,000 |

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Operational considerations.

Effective inventory accounting depends on cycle counting, standard costing updates, and integration between ERP and accounting systems. Management should monitor obsolescence, slow-moving items, and changes in market demand. Regular NRV reviews and consistent cost formulas enhance transparency and prevent unexpected write-downs.

Both IAS 2 and ASC 330 aim to ensure inventories reflect realizable economic value and production efficiency without overstatement of profitability.

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