Summary 
Developments, Key Differences & History 
Compared to IFRS 
Interpretations 
Rejection Notices 
Questions & Answers 
Articles 
AASB website 

• Applies to reporting entities and other entities that prepare general-purpose financial reports in both the for-profit and not-for profit sectors.
 

• AASB 102 applies to all inventories except:
• ­work-in-progress arising under construction contracts
 

• financial instruments
 

• biological assets related to agricultural activity and agricultural produce at the point of harvest
 

• work-in-progress of services to be provided by a not-for-profit entity for no or nominal consideration.
• AASB 102 also specifically excludes from its scope the measurement of inventories that are held by:
• ­ producers of agricultural and forest products, mineral ores, and agricultural produce to the extent that they are measured at net realisable value in accordance with well established practices in certain industries.
 

• commodity broker traders who measure their inventories at fair value less costs to sell.

• Inventories must be measured at the lower of cost and net realisable value.
 

• In respect of not-for-profit entities, inventories held for distribution at no or nominal consideration in the ordinary course of operations must be measured at the lower of cost and current replacement cost.

• The cost of inventories comprise:
• ­costs of purchase
 

• costs of conversion
 

• other costs incurred in bringing the inventories to their present location and condition, including import duties and other taxes and transport costs. Trade discounts and rebates are deducted from the costs of inventories.
• In respect of not-for-profit entities, inventories acquired for no cost or nominal consideration must be recognised at the current replacement cost at the date of acquisition.
 

• Costs of conversion of inventories comprise the costs directly related to production together with a systematic allocation of production overheads as follows:
• direct labour used in the production process
 

• direct materials that enter directly into production process and are converted into finished goods by it
 

• fixed production overheads such as depreciation or the costs of factory management
 

• variable production overheads such as indirect materials and indirect labour.
• Direct costing, where all overheads are expensed, is not permitted. Fixed production overheads are allocated to the costs of conversion based on the normal operating capacity of the production facilities, which is the level of production that an entity expects to achieve on average over several periods. Variable production overheads are allocated to each unit based on the actual use of production facilities. Unallocated variances, such as those arising from idle plant, must be recognised as an expense in the net profit or loss in the period incurred.
 

• The production process sometimes results in joint products being produced or a main product and a by-product. If the costs or conversion of each product are not separately identifiable, then they must be allocated between the products on a rationale and consistent basis, for example, the relative sales value of the joint products. In the case of by-products of relatively insignificant value costs can be assigned by deducting their net sales value from the main product.
 

• Other costs are included in the cost of inventories only to the extent that they are directly attributable to bringing the inventories to the point of sale. Examples include:
• ­the costs of designing products for specific customers
 

• storage costs that are necessary in the production process before a further production stage.
 

• borrowing costs if the inventories take a substantial period of time to get ready for intended use or sale.
• Other costs that are specifically excluded from the costs of inventories include administrative overheads and selling costs.
 

• An entity that purchases inventories on deferred settlement terms outside normal credit terms recognises the financing element of such a transaction as interest expense over the period of financing rather than as a cost of inventories.
 

• The cost of inventories may be measured using techniques such as the standard costing method or the retail method if the results obtained approximate cost.

• The cost of inventory items that are not ordinarily interchangeable or those produced and segregated for specific projects must be determined based on specific identification of their individual costs.
 

• The cost of inventories must otherwise be determined using the first-in-first-out (FIFO) or weighted average cost formula. The same cost formula must be used for all inventories having a similar nature and use to the entity.
 

• The FIFO formula is based on the assumption that inventories are sold or used up in the order in which they were acquired or produced, which means that the inventories at the end of the period are those most recently acquired or produced. The weighted average cost formula determines the cost of each item by weighting the cost of items acquired or produced. The weighting may occur periodically or as each shipment is received/produced.

• Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made and are based on the purpose for which the entity is held.
 

• Inventories are usually written down to net realisable value on an item by item basis. Grouping may be appropriate if items relate to the same product line that has similar purposes or end uses.
 

• Net realisable value is what an entity expects to realise and so is an entity-specific value. By contrast, fair value is a marketplace value based on what a knowledgeable willing buyer and seller would exchange. For example, an entity would continue to recognise materials at cost that have market prices that have declined below cost if it expects to sell the finished products at prices above cost.
 

• A new assessment of net realisable value is made at the end of each reporting period. If net realisable value increases, then the amount of a previous writedown is reversed to the extent of the increase so that the inventories are carried at the lower of cost and the new net realisable value.

• The carrying amount of inventories sold must be recognised as an expense in the same period that the related revenue from sale is recognised.
 

• Writedowns of inventories to net realisable value and inventory losses must be recognised as expenses in the period of the writedown or loss.
 

• Reversals of any writedown to net realisable value must be recognised as a reduction in the amount of inventories as an expense in the period of the reversal.
 

• In respect of not-for-profit entities, equivalent expense recognition rules apply to inventories held for distribution except that writedowns and reversals relate to current replacement cost instead of net realisable value.

• the accounting policies adopted in measuring inventories, including the cost formula used
 

• the total carrying amount of inventories and the carrying amount in classifications appropriate to the entity, for example, supplies, raw materials, and work-in-progress and finished goods.
 

• the carrying amount of inventories carried at fair value less costs to sell
 

• the amount of inventories recognised as an expense during the period
 

• the amount of any write-down of inventories recognised as an expense in the period
 

• the amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognised as expense in the period
 

• the circumstances or events that led to the reversal of a write-down of inventories
 

• the carrying amount of inventories pledged as security for liabilities.