IAS 2 is an international accounting standard that outlines the accounting treatment and disclosure requirements for inventories.
In this article, we’ll cover exactly what IAS 2 is, how it’s calculated, how it differs from GAAP and why its important to be aware of this standard as a small manufacturer. Let’s get started!
☞ Need to get your raw material and product inventory under control?
Try Craftybase - the inventory and manufacturing solution for DTC sellers. Track raw materials and product stock levels (in real time!), COGS, shop floor assignment and much more.
It's your new production central.
What does IAS 2 stand for?
IAS 2 stands for International Accounting Standard No. 2, or Inventories. This standard was issued by the International Accounting Standards Board (IASB) to provide guidance on how inventories should be accounted for, measured and disclosed in financial statements prepared in accordance with international accounting standards.
Defining inventory under IAS 2
Under IAS 2, inventory is defined as “the identifiable assets that are held for sale in the ordinary course of business, or in the process of production for such sales, or materials to be consumed in the production of goods and services”.
Examples of inventory include:
- raw material inventory
- work-in-progress (WIP)
- finished goods
- merchandise inventories
Cost of Inventory measurements under IAS 2
The primary calculation under IAS 2 is the cost of inventories, which refers to the expenditure directly related to bringing the inventory up to a saleable state and location. This includes direct costs such as raw materials and labor, as well as certain indirect costs such as storage costs. Inventory can be valued at either the lower of cost or net realizable value (NRV).
NRV is defined as the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. In other words, NRV represents how much money can be expected from selling the inventory item.
It’s important to note that when valuing inventories, overheads and other indirect costs should not be included in the cost calculation unless they are directly attributable. Otherwise, these costs should be expensed as incurred.
IAS 2 requires companies to use a consistent method of calculating inventory cost within the same accounting period. This can help to ensure that inventories are accurately and consistently valued over time.
How to calculate COGS using IAS 2
Cost of goods sold (COGS) is calculated using the same principles as IAS 2. COGS includes all costs directly attributable to bringing inventories up to saleable state and location, plus any other costs that are incurred in connection with the sale of those inventories. This includes direct costs such as material, labor, as well as certain indirect costs such as storage costs. It is important to note that when calculating COGS, overheads and other indirect costs should not be included unless they are directly attributable.
COGS should be calculated using the same consistent method for the entire accounting period in order to ensure accuracy and consistency of inventory values over time. This is especially useful if a company has multiple profit centers and products that are all sold together. By using the same calculation method for all inventories, it can be easier to compare accounting results among different departments or product lines.
In addition, IAS 2 requires companies to disclose any changes in inventory valuation methods used during the period. This helps to ensure transparency of financial statements and allows investors and stakeholders to see how a company’s inventory is being valued.
How does IAS 2 differ from GAAP?
One key difference between IAS 2 and GAAP (Generally Accepted Accounting Principles) is how inventory is valued. Under US GAAP, inventory can be valued at the lower of cost or market value, whereas under IAS 2 it’s valued at the lower of cost or net realizable value.
Additionally, under US GAAP companies are allowed to assign overhead costs to inventory if they are able to allocate them on a consistent basis, whereas IAS 2 does not allow for the inclusion of any indirect costs in the cost calculation.
GAAP also allows for LIFO calculations, whereas IAS 2 does not.
Overall, IAS 2 provides a more detailed framework for valuing inventories than US GAAP.
Why should small manufacturing businesses adopt IAS 2?
Small manufacturing businesses should be aware of IAS 2 and adopt it as a standard to ensure accuracy when valuing their inventories. This is especially important if they have multiple profit centers or product lines, as the consistent calculation method required by IAS 2 can help ensure consistent results over time.
Additionally, by following IAS 2’s more detailed framework for valuing inventory, small manufacturing businesses can be sure that they are compliant with international accounting standards.
By adopting IAS 2 and following its guidelines for valuing inventories, companies can also benefit from increased transparency of financial statements as required by the standard. This makes it easier for investors and stakeholders to understand how a company is performing and what type of inventory is being valued. Ultimately, this can help a company to gain trust from investors and stakeholders, which is essential for long-term success.
Why Craftybase is your solution to IAS 2 compliance
Craftybase is an inventory and accounting software that makes it easy to stay compliant with IAS 2.
Our software helps you to accurately value your inventories using weighted-average costing, an approved method for IAS 2 and one which which helps to ensure accuracy and consistency over time.
We also provide a simple way to track your inventory costs, giving you an accurate picture of what it’s costing to bring each item up to a saleable state.
Our software also makes it easy for you to manage your inventory and keep track of which items have been sold, so you can always be sure that you’re accurately valuing your inventories as required by IAS 2. Take our free 14 day trial to see how Craftybase can take your manufacturing business to the next level.
