IAS 2 requires entities to account for inventories at lower cost and net realisarealizable(NRV), with limited exceptions (e.g., broker-traders that account for inventories at fair value less cofewerto sell). The coronavirus pandemic has required some entities to reconsider how they do business, for example, by changing their supply chains or moving sales online. Some of these changes may lead to increased expenditure and affect the cost of inventories. For entities that manufacture or further process inventories, the cost of inventories includes an allocation of fixed production overheads that is based on the average capacity of the production facilities. What is ‘standard capacity based on an average over several periods or seasons, but it is determined under normal circumstances? Actual levels of production may be used if they approximate average capacity. However, while entities may have been able to continue production, periods of restriction on operations (e.g., lockdown) may mean that they are not producing at standard capacity.

Some entities may have lower production levels or an idle plant, for example, due to lower demand or forced closure during the lockdown. If production volumes are lower than the average, entities must not increase the fixed overhead costs allocated to each production unit. Instead, unallocated overheads are recognized as an expense in the period they are incurred. Conversely, entities may have high production for certain products due to panic buying. In these circumstances, an entity needs to decrease the fixed overhead allocated to each production unit so that inventories are not measured above cost. Care will also be needed to determine whether some other costs can be capitalized. Entities may, for example, incur additional costs to store inventories due to lower-than-usual demand. However, such costs may need to be expensed as incurred as storage costs can only be capitalized when necessary to the production process before further processing. Entities may also incur wasted materials, for example, repackaging goods initially destined for the wholesale market for retail consumers. Entities will need to assess whether wasted materials, labor, or other production costs are abnormal and if so, they must be expensed as incurred.

Disclosures about inventories, including the measurement bases used, assist users in understanding how transactions, events, and conditions are reflected in the financial statements and the sensitivity to change. At a minimum, entities will need to disclose the amount of any write-down of inventories recognized in profit or loss, as well as any subsequent reversal of such write-downs in annual financial statements and, if significant, in interim financial statements. In addition, entities need to disclose the circumstances or events that lead to a reversal of any write-down.


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  • Deloitte. (2022). IAS 2 — Inventories. https://www.iasplus.com/en/standards/ias/ias2
  • Ernest & Young. (2021). Applying IFRS IFRS accounting considerations of the Coronavirus pandemic.