IAS 2 Inventories in the UAE: Practical Guide for Businesses

Introduction to IAS 2 in the UAE Corporate Tax Framework

With UAE Corporate Tax now in effect, IAS 2 has moved from an accounting standard to a tax-critical standard for businesses preparing IFRS financial statements in the UAE.

In the UAE, IFRS-based financial statements are now the default basis for calculating taxable income under Federal Decree-Law No. 47 of 2022 and Ministerial Decision No. 114 of 2023 issued by the Ministry of Finance, with IFRS or IFRS for SMEs required for most taxable persons.

What IAS 2 Covers Under IFRS

IAS 2 deals with how inventories are measured and recognised in profit or loss, including cost formulas, overhead allocation, and write-downs to net realisable value. For trading, manufacturing, and retail businesses, this standard directly affects cost of sales and taxable profit in the UAE.

Who Must Apply IAS 2 in the UAE

The standard applies to UAE mainland and Free Zone entities that prepare financial statements in accordance with IFRS or IFRS for SMEs for Corporate Tax, banking, regulatory, or investor reporting.

This includes taxable persons under Federal Decree-Law No. 47 of 2022 and Qualifying Free Zone Persons, who must maintain IFRS-based audited financials for the Federal Tax Authority and Free Zone authorities.

Common IAS 2 Inventory Mistakes in the UAE

Use of Disallowed Costing Methods

Continuing to use disallowed cost formulas, such as LIFO, instead of FIFO or weighted-average methods permitted by IAS 2.

Incorrect Overhead Allocation

Under-allocating production overheads or excluding key costs, leading to distorted margins and inconsistent taxable income across periods.

Delayed Inventory Write-Downs

Delaying or ignoring write-downs for slow-moving, obsolete, or damaged inventory, which can trigger audit adjustments and penalty risks.

Key Inventory Disclosures Under IAS 2

• Accounting policies for measuring inventories, including the cost formula used, such as FIFO or weighted average.
• Carrying amounts of inventories by major class, such as raw materials, work in progress, finished goods, merchandise along with any significant write-downs or reversals.
• Inventory pledged as security, held in Free Zones, or subject to consignment or third-party storage arrangements that may interest tax and customs authorities.

Practical Steps to Ensure IAS 2 Compliance

• Review existing inventory costing policies to ensure they comply with IAS 2 and are consistently applied across UAE entities.
• Tighten stock count procedures and ageing analyses so that write-downs are timely, documented, and supportable during audit or FTA review.
• Align ERP or inventory systems so that IFRS-compliant costing feeds automatically into the general ledger and Corporate Tax calculations.

FAQs on IAS 2 and UAE Corporate Tax

• Q1. Does IAS 2 apply to Free Zone traders?

  Yes. Free Zone trading and distribution entities preparing IFRS financials for Corporate Tax or banking purposes must apply IAS 2 to inventory measurement.




• Q2. Can UAE companies still use LIFO?

  No. IAS 2 does not permit LIFO. Using it could lead to restatements, audit findings, and tax complications in the UAE.




• Q3. How often should inventory be written down?

  At each reporting date, management should assess whether net realizable value is lower than cost and document the basis for any write-downs.