Specific identification is a method of inventory valuation used in accounting to track and assign costs to individual units or items of inventory based on their unique identification. Under this method, each item in inventory is individually identified, and its specific cost is matched with its specific sale or usage. This method is preferred by the International Financial Reporting Standards (IFRS) when it is possible to reliably identify and measure the costs of individual inventory items.
Here's how specific identification works:
Unique Identification: Each unit or item in the inventory is assigned a unique identification number, code, or other distinguishing characteristic that allows it to be tracked separately from other items.
Cost Tracking: The cost of each individual item is recorded and associated with its unique identification. This cost includes not only the purchase price but also any additional costs directly attributable to that specific item, such as shipping or handling costs.
Matching Costs to Revenues: When an item is sold or used in production, its specific cost is matched with the revenue generated from the sale or the cost of goods sold in the production process. This ensures that the cost recognized in the income statement accurately reflects the cost of the specific item sold.
Specific identification is particularly useful for businesses with inventory items that have unique characteristics, high unit values, or items with varying costs. It allows for precise matching of costs to revenues and provides a more accurate representation of the financial results, especially when inventory items are not homogenous.
However, it's important to note that specific identification may not always be practical or reliable. In cases where it is difficult to distinguish between individual inventory items or where items are indistinguishable (e.g., in a large bin of identical widgets), alternative inventory valuation methods like first-in, first-out (FIFO) or weighted average cost may be used in accordance with IFRS and other accounting standards.
IFRS generally allows the use of specific identification when it is feasible and provides reliable cost measurements. The key is to ensure that the chosen inventory valuation method accurately represents the economic reality of the business's inventory transactions.