AS 2: Valuation of Inventories
AS 2 prescribes that inventories be valued at the lower of cost and net realisable value (NRV), and defines what goes into cost — purchase cost, conversion cost and other costs incurred to bring inventory to its present location and condition.
- Standard
- AS 2
- Core rule
- Cost vs NRV
- Cost formulas
- FIFO / Wtd Avg
- Tested at
- Foundation+
Applicability
Applies to all inventories except WIP under construction contracts, financial instruments, and producers' inventories like livestock and mineral ores measured at NRV per established practice.
Key points to remember
- Measurement rule: lower of cost and net realisable value, applied item by item or by groups of similar items.
- Cost formulas permitted: specific identification, FIFO and weighted average — LIFO is not permitted.
- Excluded from cost: abnormal wastage, storage costs (unless necessary in production), administrative overheads and selling costs.
- NRV = estimated selling price less estimated costs of completion and costs necessary to make the sale.
How the exam tests it
Numerical questions on computing cost vs NRV and on exclusions from cost are near-certain in Foundation Accounting and Intermediate Advanced Accounting. MCQs often test the LIFO prohibition.
Related standards
Have questions?
Find answers.
Still unsure about something? We're happy to help you figure it out.
Talk to usIs LIFO allowed under AS 2?
No. AS 2 (Revised) permits specific identification, FIFO and weighted average cost formulas. LIFO is not permitted for inventory valuation.
What costs are excluded from inventory cost under AS 2?
Abnormal amounts of wasted materials, storage costs unless necessary in the production process, administrative overheads that do not bring inventories to their present location and condition, and selling and distribution costs.
How is net realisable value calculated?
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.