SFRS(I) 1-2 prescribes the accounting treatment for inventories. Its central principle is that inventories are measured at the lower of cost and net realisable value — a straightforward application of prudence that prevents inventory from being carried at more than the amount expected to be recovered from selling it. It is the Singapore equivalent of IAS 2 under IFRS and Ind AS 2 in India, and, because SFRS(I) is issued to be identical to IFRS, it is in substance IAS 2 as applied in Singapore.
Objective and scope
The objective is to prescribe the accounting treatment for inventories, providing guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value. Inventories are assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services. The standard applies to all inventories except certain items dealt with by other standards (such as financial instruments, and biological assets related to agricultural activity), and it does not apply to the measurement of inventories held by certain producers and commodity broker-traders who measure at fair value less costs to sell.
The core measurement rule
Inventories are measured at the lower of cost and net realisable value. This is the fundamental rule, and the two inputs are defined precisely.
Cost of inventories comprises all costs of purchase (the purchase price, import duties and other non-recoverable taxes, and transport, handling, and other costs directly attributable to acquisition, less trade discounts and rebates); costs of conversion (direct labour and a systematic allocation of fixed and variable production overheads); and other costs incurred in bringing the inventories to their present location and condition. Certain costs are excluded from the cost of inventories and recognised as expenses when incurred — for example, abnormal amounts of wasted materials, labour, or other production costs; storage costs (unless necessary in the production process before a further production stage); administrative overheads that do not contribute to bringing inventories to their present location and condition; and selling costs.
Net realisable value (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. NRV is an entity-specific value, distinct from fair value.
Cost formulas
For inventory items that are not ordinarily interchangeable, and for goods or services produced and segregated for specific projects, cost is assigned using specific identification of their individual costs. For other inventories, cost is assigned using either the first-in, first-out (FIFO) formula or the weighted average cost formula. An entity uses the same cost formula for all inventories of a similar nature and use. Critically, the last-in, first-out (LIFO) method is not permitted under SFRS(I) 1-2 (as under IAS 2 and Ind AS 2).
Write-down to net realisable value
The cost of inventories may not be recoverable if they are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. In such cases, inventories are written down to net realisable value. The write-down is usually carried out on an item-by-item basis, though in some circumstances it may be appropriate to group similar items. The assessment of NRV is made at each reporting period. When the circumstances that previously caused inventories to be written down no longer exist, or when there is clear evidence of an increase in NRV because of changed economic circumstances, the amount of the write-down is reversed (limited to the amount of the original write-down) so that the new carrying amount is the lower of cost and the revised NRV.
Recognition as an expense
When inventories are sold, their carrying amount is recognised as an expense (cost of sales) in the period in which the related revenue is recognised. The amount of any write-down of inventories to NRV, and all losses of inventories, are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of a write-down is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.
A brief illustration
A Singapore trading company holds goods that cost S$100,000. At the reporting date, some of the stock has become slow-moving: its estimated selling price is S$90,000, and the costs to complete and sell it are S$5,000, giving a net realisable value of S$85,000. Because inventories are carried at the lower of cost (S$100,000) and NRV (S$85,000), the stock is written down to S$85,000 and the S$15,000 write-down is recognised as an expense. If, in a later period, the market for the goods recovers and NRV rises to S$95,000, the write-down is reversed up to the original cost — but only to the extent of the earlier write-down, so the carrying amount returns to S$95,000 (not above the S$100,000 original cost). The company assigns cost using FIFO or weighted average, consistently for similar inventories, and never LIFO.
How SFRS(I) 1-2 relates to IFRS and Ind AS
SFRS(I) 1-2 is identical to IAS 2 under IFRS, and therefore very closely aligned with Ind AS 2 in India — the same lower-of-cost-and-NRV rule, the same components of cost, the same permitted cost formulas (FIFO and weighted average), the same prohibition on LIFO, and the same treatment of write-downs and their reversal. Because both Singapore and India converge to the IFRS text for this standard, the accounting outcome is materially the same across the three frameworks; the differences that exist are minimal and largely a matter of the surrounding regulatory context rather than the measurement of inventory itself.
Common pitfalls
Recurring issues include using the prohibited LIFO method; including selling costs, abnormal wastage, or non-production administrative overheads in the cost of inventories; failing to write inventories down to net realisable value when selling prices have declined or stock has become obsolete; reversing a write-down above the original cost; and applying different cost formulas to inventories of a similar nature and use.
Why this is cleaner on a unified system
Accounting for inventory — tracking cost, applying a consistent cost formula, assessing net realisable value, and recognising write-downs and their reversals — is more reliable when the inventory records and the general ledger sit in one connected system. When purchases, production costs, and inventory movements flow into the accounts from a single source of truth, applying the lower-of-cost-and-NRV rule and recognising the correct cost of sales is more straightforward than reconciling a separate inventory system against the accounts.
This article is a detailed educational summary of SFRS(I) 1-2 in plain language. It is not a substitute for the full text of the standard. Accounting standards are amended from time to time; always verify the current, authoritative text of SFRS(I) 1-2 as issued by the Singapore Accounting Standards Council before relying on it, and consult a qualified professional accountant for application to your specific circumstances.