Inventory constitutes a significant portion of a company's current assets. The valuation of inventory affects both the profitability and the financial position. Therefore, due to changing business environment, inventory valuation has undergone many changes the world over. In India, the applicable accounting standard is AS-2. Due to globalization, Indian companies have to adopt International Accounting Standards. The applicable Accounting Standard is IAS 2. There are certain provisions in this standard which have far-reaching effects on a company's profitability and financial position. These provisions may affect profitability not only for the current year but also for the years to come. Though there are certain similarities there are significant differences as well.

Accounting standards are authoritative statements issued by a competent professional body which regulates the profession of accountancy. The purpose of the standards is to bring about uniformity, relevance and transparency in the measurement and presentation of financial information, which consists of assets, liabilities, income, and expenses.

Globalization has made it imperative to bring about uniformity in the interpretation of the financial information. Traditionally, businesses have been preparing the financial statements as per the customs, practices, rules and regulations followed in the country in which the business operates. This created practical difficulties for a business located overseas. For example, an American company intending to acquire a business in India may not be aware of the Indian accounting practices, etc., for the preparation of the financial statements. The acquirer will have to convert these statements as per US GAAP to make them understandable and relevant for interpretation. The acquirer may also have similar proposals from other countries, which may also prepare financial statements as per their own practices. Considerable time would be lost in converting them in the form used by the acquirer. To make these proposals comparable, the financial information, if presented in a `global accounting language', would facilitate easy processing and decision making.

Inventory constitutes a significant portion of the current assets of a manufacturing business. Valuation of inventory materially affects, not only the income stated in the profit and loss account, but also the financial position as stated in the balance sheet. Tax liability and drawing power in case of inventory-based finance also are affected. An inventory shown in a balance sheet affects, not only the current year's income but the income for the following year as well. According to the matching concept, inventory which is unsold, should be carried forward at some value to the next accounting year. IAS 2 prescribes the methods for valuing the inventory.

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