Inventories (Ind AS 2): formula sheet

Key formulas

Net realisable value (NRV)

NRV = Estimated selling price in the ordinary course of business − Estimated costs of completion − Estimated costs necessary to make the sale

Entity-specific. Use the ordinary-course selling price, not a forced-sale price.

Fair value vs NRV

NRV is entity-specific; fair value is not. NRV may not equal fair value less costs to sell.

Fair value is an orderly-transaction price between market participants at the measurement date (Ind AS 113).

NRV where sales contracts exist

Quantity covered by firm contracts: NRV uses the contract price. Excess quantity: NRV uses general selling prices.

Provisions from firm sales contracts exceeding inventory held, or from firm purchase contracts, are dealt with under Ind AS 37.

Scope exclusions (measurement only)

(a) Producers of agricultural and forest products, agricultural produce after harvest, minerals and mineral products, to the extent measured at NRV under well-established industry practice. (b) Commodity broker-traders measuring at fair value less costs to sell.

Changes in value are recognised in profit or loss in the period of the change.

Materials held for production

Materials are not written down below cost if the finished products are expected to sell at or above cost. If the finished products' cost exceeds NRV, write materials down to NRV.

Replacement cost of materials may be the best available measure of their NRV.

Measurement rule

Carrying amount = lower of (Cost, NRV)

Apply item by item. Group only for similar or related items, such as the same product line. Do not compare whole-stock totals.

Net realisable value

NRV = Estimated selling price − Estimated costs of completion − Estimated costs necessary to make the sale

For finished goods, costs of completion are nil. Use the price expected in the ordinary course of business.

Write-down

Write-down = Cost − NRV (only when NRV < Cost)

Charge to profit or loss in the period of write-down.

Reversal limit

Reversal = Revised carrying amount − Earlier carrying amount, limited to the original write-down

New carrying amount = lower of cost and revised NRV. Never exceeds original cost.

Materials held for production

Write down materials only if finished goods NRV < cost of finished goods

Then write materials down to NRV, often estimated by replacement cost.

Cost of inventories

Cost = Purchase cost + Conversion cost + Other costs to bring to present location and condition

Cost of purchase is net of trade discounts and rebates, and excludes recoverable taxes.

Fixed overhead absorption rate

Fixed overhead per unit = Total fixed production overheads ÷ Normal capacity (units)

When production is abnormally low, use normal capacity. Unallocated overhead is an expense of the period.

Fixed overhead when production exceeds normal

Fixed overhead per unit = Total fixed production overheads ÷ Actual production

Applies when actual production is higher than normal capacity, so that inventory is not measured above cost.

Variable overhead

Variable overhead per unit = Total variable production overheads ÷ Actual production

Always allocated on actual use of the production facilities.

Unabsorbed fixed overhead

Expense = Fixed overheads − (Actual units × Rate on normal capacity)

Charged to profit or loss. It is not added to closing inventory.

Joint cost allocation (relative sales value)

Share of product = Joint cost × Sales value of product at split-off ÷ Total sales value at split-off

One acceptable basis. The by-product is usually carried at net realisable value and deducted from joint cost.

Excluded costs

Abnormal waste, storage (unless necessary in production), administrative overheads unrelated to production, selling costs

These are expensed in the period incurred.

Cost formulas allowed

Specific identification | FIFO | Weighted average

Specific identification for non-interchangeable items and project goods. FIFO or weighted average for the rest. LIFO is not allowed.

Weighted average cost per unit

Total cost of goods available ÷ Total units available

In the periodic method, use the whole period's opening stock and purchases. In the moving method, recompute after every purchase.

FIFO closing stock

Closing units valued at the most recent purchase costs, working backwards

Cost of goods sold takes the oldest costs first.

Cost of goods sold

Opening stock + Purchases (cost) − Closing stock

Use the same costs consistently in all three figures.

Retail method: cost-to-retail ratio

(Opening stock at cost + Purchases at cost) ÷ (Opening stock at retail + Purchases at retail)

This simple form assumes no markups or markdowns. Adjust the retail figures if the question gives them.

Retail method: closing stock at cost

Closing stock at retail × Cost-to-retail ratio

Closing stock at retail = Goods available at retail − Sales.

Standard cost condition

Standard cost is acceptable only if it approximates actual cost

Standards must be reviewed regularly and revised in light of current conditions.

Carrying amount of inventory

Carrying amount = Lower of (Cost, Net Realisable Value)

Compare item by item or group of similar items, not on a total basis unless grouping is justified.

Cost of goods sold (expense on sale)

Opening inventory + Purchases and conversion costs − Closing inventory

Closing inventory is valued at lower of cost and NRV. The carrying amount of items sold is the expense (para 34).

Write-down to NRV

Write-down = Cost − NRV (if NRV < Cost)

Expensed in the period the write-down occurs (para 34).

Reversal of write-down

Reversal = Increase in NRV, limited to the original write-down

Credited against inventories expensed in that period. The new carrying amount stays at the lower of cost and revised NRV.

Net change in inventories (nature-wise)

Net change = Opening inventory − Closing inventory

A positive figure is a charge to profit or loss; a negative figure is a credit. Disclosed along with raw material, labour and other costs (para 39).

Weighted average cost

Average cost = (Cost of opening stock + Cost of purchases) ÷ (Units of opening stock + Units purchased)

Para 27 allows periodic calculation or recalculation on each receipt. FIFO assumes the earliest items are sold first.

Quick revision

• Inventories are held for sale, in production for sale, or as materials to be consumed in production or services.
• Measure at the lower of cost and NRV.
• NRV = estimated selling price − estimated costs of completion − estimated costs necessary to make the sale.
• Cost includes purchase cost, conversion cost and other costs to bring inventory to present location and condition.
• Purchase cost: price, import duties and non-refundable taxes, transport, handling, less trade discounts and rebates.
• Excluded from cost: abnormal waste, storage costs not needed in production, administrative overheads, selling costs.
• Fixed production overheads are absorbed on normal capacity; in low output, the unabsorbed amount is an expense.
• Use specific identification for items not interchangeable; otherwise FIFO or weighted average. LIFO is not permitted.
• Standard cost and retail methods may be used only if results approximate cost.
• Write-downs to NRV are usually made item by item; reverse them if NRV recovers, but only up to the original write-down.
• Carrying amount of sold inventory is expensed in the period the related revenue is recognised.

Common mistakes

• Saying all inventories of farmers, miners and brokers are outside Ind AS 2. Fix: Add the condition every time: only to the extent measured at NRV under industry practice, or at fair value less costs to sell for broker-traders.
• Saying NRV and fair value are the same thing. Fix: Remember that NRV is entity-specific, fair value is not. NRV may not equal fair value less costs to sell.
• Using selling price instead of NRV Fix: Always deduct costs to complete and costs to sell first. Only then compare with cost.
• Netting gains against losses across items Fix: Compare item by item. An item with NRV above cost stays at cost and cannot offset another item's write-down.
• Including recoverable GST in the purchase cost. Fix: Include only non-recoverable taxes. If input credit is available, exclude the GST.
• Absorbing fixed overheads on actual output when output is below normal capacity. Fix: Use normal capacity when actual output is lower. Charge the unabsorbed fixed overhead to profit or loss.
• Using LIFO or treating it as an option. Fix: State clearly that Ind AS 2 does not permit LIFO. Only specific identification, FIFO and weighted average are cost formulas.
• Valuing closing stock under FIFO from the oldest purchases. Fix: Under FIFO, the oldest units are sold first, so closing stock comes from the latest purchases. Work backwards from the last purchase.
• Valuing the total inventory against total NRV instead of item by item. Fix: Compare cost and NRV for each item or group of similar items. Gains are not set off against write-downs of other items.
• Treating a reversal of write-down as other income. Fix: Para 34 says the reversal reduces the amount of inventories recognised as an expense in that period. Do not show it as income.

Exam tips

• In theory answers, state the exclusions in two points and always add the condition on measurement basis.
• In MCQs, watch for options that say the Standard does not apply at all. The exclusion covers only measurement requirements.
• For NRV numbers, show the deduction of completion and selling costs as separate lines to earn step marks.
• For a 'differentiate NRV and fair value' question, give at least three points: meaning, entity-specific or not, and that NRV may not equal fair value less costs to sell.
• If contracts are mentioned, split the quantity into contracted and excess before computing NRV.
• Start every numerical answer with a table showing Cost, NRV and Lower for each item. It earns step marks even if one figure is wrong.
• In MCQs, check whether the question gives costs to complete. Missing that deduction is the most common trap.
• State the rule in one line in written answers: lower of cost and NRV, item by item, write-down to profit or loss, reversal limited to the original write-down.