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, 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. The standard applies to all inventories except certain items dealt with by other standards.
The core measurement rule
Inventories are measured at the lower of cost and net realisable value. 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 and expensed when incurred — for example, abnormal wastage, storage costs (unless necessary in the production process), 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.
Cost formulas
For inventory items that are not ordinarily interchangeable, and for goods produced and segregated for specific projects, cost is assigned using specific identification. For other inventories, cost is assigned using either the first-in, first-out (FIFO) formula or the weighted average cost formula, applied consistently for inventories of a similar nature and use. The last-in, first-out (LIFO) method is not permitted under SFRS(I) 1-2.
Write-down to net realisable value
The cost of inventories may not be recoverable if they are damaged, if they have become obsolete, or if their selling prices have declined. In such cases, inventories are written down to net realisable value, usually on an item-by-item basis. When the circumstances that caused the write-down no longer exist, or there is clear evidence of an increase in NRV, the write-down is reversed (limited to the amount of the original write-down).
A worked example
A Singapore trading company holds three product lines at the reporting date. It applies the lower-of-cost-and-NRV rule line by line:
| Product | Cost (S$) | Est. selling price (S$) | Costs to complete & sell (S$) | NRV (S$) | Carrying amount = lower (S$) |
|---|---|---|---|---|---|
| Product A | 100,000 | 130,000 | 8,000 | 122,000 | 100,000 (cost) |
| Product B | 70,000 | 58,000 | 6,000 | 52,000 | 52,000 (NRV) |
| Product C | 35,000 | 32,000 | 3,000 | 29,000 | 29,000 (NRV) |
| Total | 205,000 | — | — | — | 181,000 |
For Product A, cost (S$100,000) is below NRV, so it stays at cost — no write-down. For Product B, NRV (S$52,000) is below cost, so it is written down to S$52,000, and the S$18,000 write-down is expensed. For Product C, NRV (S$29,000) is below cost, so it is written down to S$29,000, a S$6,000 expense. The total carrying amount of inventory becomes S$181,000, and total write-downs of S$24,000 are recognised as an expense.
If, in a later period, the market for Product B recovers and its NRV rises to S$66,000, the write-down is reversed — but only up to the original cost of S$70,000, so the carrying amount returns to S$70,000, not above it.
Recognition as an expense
When inventories are sold, their carrying amount is recognised as an expense (cost of sales) in the period the related revenue is recognised. The amount of any write-down, and all losses of inventories, are recognised as an expense in the period they occur. Any reversal of a write-down reduces the amount of inventories recognised as an expense in the period of the reversal.
How SFRS(I) 1-2 relates to IFRS
SFRS(I) 1-2 is identical to IAS 2 under IFRS — 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. An entity familiar with IAS 2 will find SFRS(I) 1-2 to be the same standard.
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.