Costs Necessary to Sell Inventories (IAS 2)

Date recorded:


In its February 2021 meeting, the Committee discussed a submission about whether an entity includes all costs necessary to make the sale or only those that are incremental to the sale as the “estimated costs necessary to make a sale” when determining the net realisable value of inventories. The staff concluded that IAS 2 does not allow an entity to limit such costs to only those that are incremental. Most of the Committee members agreed with the analysis and conclusion but raised concerns that such conclusion may contradict with predominate practice.

Out of the 21 comment letters received, most respondents agreed with the analysis and conclusion in the tentative agenda decision. Some respondents disagreed and considered it would also be acceptable to include only incremental costs in such costs. A number of respondents suggested not to finalise the tentative agenda decision.

Staff analysis

One respondent considered that if terms (“cost to sell” and “costs of disposal”) are defined in IFRS Standards (IFRS 5 and IAS 36, respectively) and appear in another IFRS Standards, like IAS 2, without a definition, it is appropriate to apply the same definitions in these Standards in accordance with IAS 8:11. IFRS 5 and IAS 36 require an entity to consider incremental costs only and such could apply similarly to “estimated costs necessary to make a sale” when determining the net realisable of inventories. The staff explained that IAS 36 was not designed to apply to the measurement of assets that an entity sells in its ordinary course of business. Referring to IAS 36 or IFRS 5 in determining the net realisable value of inventories could fail to achieve the objective described in IAS 2:28.

Moreover, some of the respondents referred to IAS 36:BCZ31-BCZ36 which explain that including only incremental costs when determining “net selling price” is consistent with the purpose of the impairment test and that in most cases, “net selling price” and “net realisable value” will be similar. However, the staff were of the view that these paragraphs only explain the IASC’s conclusion back then in the context of the requirements in IAS 36 and should not be extended to other IFRS Standards. Also, IAS 36:BCZ37-BCZ39 clarified that there are intended differences between the measurement requirements in IAS 2 and IAS 36 because of the particular characteristics of inventories.

Some respondents raised concerns that the finalisation of the tentative agenda decision may cause many entities to amend their practice because entities generally include incremental costs only and such a change may be costly and complex for them. The staff explained that a change in accounting policy for at least some entities is a consequence of many agenda decisions and these entities would be entitled to sufficient time to implement that change.

A few respondents suggested providing guidance and examples to help entities determine which costs to include as “costs necessary to make the sale”. However, the staff were of the view that doing this would add or change requirements in IFRS Standards because IAS 2 does not identify such costs. An entity should use its judgement to determine which costs are necessary to make the sale considering its specific and circumstances.

A few respondents recommended defining “incremental costs” in the tentative agenda decision because not defining it could lead to different interpretations of the term. The staff continued to agree with the Committee’s decision not to define it to avoid implying that there is a specific definition to be used in the context of IAS 2. Moreover, regardless of how an entity interprets it, excluding costs the entity must incur to sell its inventories would be inconsistent with the requirements.

Staff recommendation

The staff recommended finalising the agenda decision with no change.


Some Committee members continued to disagree with the agenda decision's analysis and conclusion and recommended standard-setting by the Board on this matter. They considered that IAS 36:BCZ31-BCZ36, which requires entities to include incremental cost in the "net selling price", could be referenced because IAS 36:BCZ 37-BCZ39 states that "net selling price" and "net realisation value" in IAS 2 are similar in most cases. Therefore, it would be permissible to include only incremental cost in determining net realisation value given there is a lack of clarity in defining this in IAS 2. Also, finalising the agenda decision may result in diversity in interpretation, because it only states what not to do (i.e. not to limit only to incremental costs) but it does not state what to include in determining net realisation value.

Most of the other Committee members agreed with the staff analysis and conclusion and to finalise the agenda decision. They considered that IAS 2:28 clearly explains net realisable value should not only include incremental costs. Incremental costs are a subset of all the cost necessary to make the sale. They said the agenda decision should not be interpreted in a way that precludes the possibility that net realisable value equals incremental costs for some specific cases. Committee members agreed with the agenda decision which asks entities to apply judgement in assessing what costs entities include in the determination of net realisable value. The practice may vary due to the nature of the business and is based on the specific facts and circumstances. It is not possible to list all the costs to be included and Committee members were of the view that the current drafting of the agenda decision is the best possible wording. Also, they were of the view that finalising the agenda decision would help reduce diversity in practice. They expressed sympathy for entities which include incremental costs only in the determination of such costs and acknowledged that the change could be complex and costly. However, sufficient time is allowed for them to implement the change.

In contrast, some Committee members disagreed with finalising the agenda decision although they agreed with the analysis in it. They considered finalising would result in diversity and confusion because the agenda decision does not specify what costs are the necessary costs to make the sale and entities may have different interpretations. One Committee member said entities may include non-cash items in the determination of such cost, which he does not agree with. Therefore, Committee members suggested to include high-level guidance to explain what costs entities include in determining such costs and suggested the Board undertake standard-setting on this.

The Committee decided, by a majority vote of 9:5, to finalise the agenda decision.

Related Topics

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.