What is Specific identification method of inventory valuation?

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Specific identification method is just another method to value ending inventory of the business to be reported in the financial statements. IAS 2 permits the use of specific identification method.

According to this method each identified items of inventory is assigned specific cost and hence the name specific identification. In simple words cost is attributed to each item in the inventory individually that is identifiable specifically. Here the point is to be noted that each item of inventory must be identifiable otherwise specific assignment of cost will not be possible.

This method is applied by entities on such inventories which are not interchangeable i.e. one item cannot be substituted with another item for use or sale purposes. For example furniture manufacturers most of the time produce such items which cannot be replaced with another item of furniture and also each item consumes different amounts of input thus each item cost differently. Therefore, to value such inventory, furniture manufacturers use specific identification method to value inventory where each item is assigned specific amounts of cost.

This method is also employed by those entities that work on project basis and they value the inventory using specific identification method which is separated for a particular project.

However, when inventory items are not heterogeneous are are ordinarily interchangeable i.e. have similar nature and use then inventory at the year is usually valued using a particular cost assumption formula like First-in,  First-out (FIFO) or Last-in, First-out (LIFO). However IAS 2 allows only FIFO method to be used by the entities following IFRSs for preparation and presentation of financial statements for general users.

Another alternative method for inventory valuation is weighted average method which averages the value of inventory held at the start of the period and value of inventory purchased or produced during the period.

IAS 2 allows the use of specific identification method, FIFO method and weighted average cost method to value ending inventory. Its up to the management of the entity select the method of inventory valuation by considering relevant factors.

Lastly, one of the major drawbacks of this method is that inventory can be used to manipulate the amount of profit to be reported in the Income Statement much easily as compared to other inventory valuation method.

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