Choose a Current International Accounting Standard (ias) or International Financial Reporting Standard (ifrs).Briefly Summarise Its Provisions and Assess Whether the Standard Can Be Considered to Be Principles-Based or Rules-Based

Introduction

There are mainly two accounting standards: principle-based and rule-based in the accounting system. This paperwork will chose one regulation in International Accounting Standard, which is covered the regulations on inventory. After the brief summary of IAS 2, there will be a discuss about the IAS 2’s characteristics.

Summary of IAS 2

In summary, the objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides guidance not only for determining the cost of inventories and for subsequently recognising an expense, involving any write-down to net realisable value, but also on the cost formulas that are used to assign costs to inventories.

The definition of Inventories in IAS 2 includes work in process (assets in the production process for sale in the ordinary course of business), finished goods (assets held for sale in the ordinary course of business) and raw materials (materials and supplies that are consumed in production). [IAS 2.6]

As the fundamental Principle of IAS 2, Inventories should be measured at the lower of cost and net realisable value (which 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). [IAS 2.9]

The measurement of cost of inventories shall comprise all costs of purchase (including taxes, transport, and handling), costs of conversion (including fixed and variable manufacturing overheads) and other costs incurred in bringing the inventories to their present location and condition. [IAS2.10]

The cost of inventories shall be assigned by using the first-in, first-out (FIFO) or weighted average cost formula for items that are interchangeable. The LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no longer allowed. However, for inventory items that are not interchangeable and goods or services produced and segregated for specific projects, specific costs are attributed to the specific individual items of inventory. [IAS 2.23]

As IAS 2 required, an entity shall use the same cost formula for all inventories having a similar nature and use to the entity. For inventories with a different nature or use, different cost formulas may be justified. [IAS 2.25]

Finally, as addressed in IAS 18 revenue recognition for the sale of goods, when inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories shall be recognised as an expense in the period the write-down or loss occurs. [IAS 2.34] The amount of any reversal of any write-down of inventories arising from an increase in net realisable value shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs. [IAS 2.34]

Principle-based or Rule-based discussion

Before the discussion of whether the IAS 2 belongs to Principle-based standard or rule-based standard, the definitions of those two standards are necessary to be addressed. According to the Financial Services Authority (2007), the Principles-based accounting provides a conceptual basis for accountants to follow and place greater reliance on principles and outcome-focused, high-level rules as a means to drive at the regulatory aims we want to achieve, and less reliance on prescriptive rules. Whereas the rule-based standard provide extremely detailed rules that attempt to contemplate virtually every application of the stand. Rules-based systems lead to an attitude of merely ensuring that technical requirements are met and managers justifying ignoring the substance.

By reviewing the definitions of the principle-based and rule-based standard, it is not difficult to determine the ISA 2 standard is one example of principle-based standard.

Firstly, as IAS 2.23 mentioned, various method of valuation are theoretically available, including FIFO, Weighted average or any similar method but without any specific recommendation. This statement implies that under the general principle which inventory is stated in periodic financial statements should be the total of the lower of costs and net realisable value of the separate items of inventory or of group of similar items; the organisation can select the most suitable method based upon sound professional advice and the organisation’s unique operation conditions. This provision of inventory valuation matches the characteristics of principle-based standard that provide areas of subjectivity and choice to management.

Secondly,