IFRS inventory accounting guidelines require businesses to measure inventory at cost, record it at net realizable value, and make disclosures about inventory accounting practices. Historical cost and net realizable value are critical for accuracy, and proper disclosures are necessary.
Inventory accounting is one of the most active accounting activities as a company’s inventory can be its second largest asset behind human capital. IFRS inventory accounting has specific guidelines that a business must follow to properly maintain the value of assets on the ledger. Some universal guidelines for most businesses with inventory include measuring inventory at cost, recording inventory at net realizable value, and making disclosures about inventory accounting practices. Other IFRS inventory accounting guidelines conform to IFRS revenue accounting guidelines. The guidelines for this accounting practice relate more to revenue recognition, which is a different topic for accounting purposes.
Businesses must record inventory at historical cost or what the original purchase price of the goods was. Other costs recorded in the IFRS inventory account include taxes, freight, handling, costs to convert raw materials into salable inventory, and similar costs that bring inventory to a particular location or salable state. All of these costs must be net of purchase price discounts received when purchasing inventory because discounts reduce the amount paid for the goods. Proper historical cost is critical for IFRS inventory, as a company can easily attempt to increase its book value through fictitious inventory values. External audits typically heavily review this account to ensure the accuracy and validity of the inventory balances in the ledger.
Net realizable value is a method that the IFRS inventory accounting guidelines use to ensure the accuracy of a company’s inventory. For accounting purposes, the net realizable value is the estimated sales price less estimates of the cost of completion or estimates of the cost of activities necessary to sell the inventory. When a company needs to reduce inventory, the result is an expense recorded on the income statement. Although called an expense, the amount actually goes to the company’s cost of goods sold account. A reversal for net realizable value is possible, the entry being the opposite of that described above.
Disclosures represent statements made in addition to published financial statements for use by stakeholders. The IFRS inventory guidelines require disclosures about inventory accounting policy, book value, and fair value book value, in addition to inventory write-downs, net realization reversals, inventory recorded as collateral, and cost of inventories recognized as an expense. Other disclosures may be required as well, but these are the ones that relate to inventory. Companies should consult with a certified accountant on IFRS inventory accounting to ensure that their financial statements are accurate and valid.
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