IAS 2 Inventory dictates that accounting treatment of inventory. According IAS 2:
Inventory should be recognized at cost.
Inventory should be test for impairment before disclosing it into financial statements.
Impairment loss should be immediately recognized in profit & loss statement.
Inventory will be impaired if;
NRV (Net realisable value) is lower than cost.
- NRV is the value that could be realised through making a sale after deducting all expenses necessary to make a sale.
- Market selling price is the price at which inventory could be sold in arm’s length transaction.
- Selling expense is expense need to sell goods to customer such as delivery cost, salesperson commission etc.
- Rectification cost is cost incurred in bringing inventory to saleable condition such as repairing, repacking, refurnishing etc.