Skip to content

Financial Reporting · Ind AS 2 Inventories

Ind AS 2 Scope and Definitions of Inventories

Updated 5 October 2026 · Fact-checked

Ind AS 2 applies to all inventories except a few excluded items: work in progress under construction contracts, financial instruments, and biological assets and agricultural produce at the point of harvest. Some producers measure inventories at NRV under well-established industry practice, and commodity broker-traders measure at fair value less costs to sell. To solve a question, test scope, then apply the definitions of inventories, NRV and fair value.

Understand Ind AS 2 Scope and Definitions of Inventories

Inventories are assets held for sale in the ordinary course of business, assets in the process of production for such sale, or materials and supplies to be consumed in production or in rendering services. Three ideas sit inside this definition: the purpose of holding, the stage of production, and the ordinary course of business.

Purpose decides everything. A car held by a dealer for resale is inventory. The same car used by the dealer as a staff vehicle is PPE under Ind AS 16. Land held for sale in the ordinary course is inventory. Land held for rental or capital appreciation is investment property. Always ask why the entity holds the item.

Ind AS 2 does not apply to everything that looks like stock. It excludes: work in progress arising under construction contracts, including directly related service contracts (these now fall under Ind AS 115); financial instruments (Ind AS 32, Ind AS 107 and Ind AS 109); and biological assets related to agricultural activity and agricultural produce at the point of harvest (Ind AS 41).

Only biological assets and produce at the point of harvest are excluded. Ind AS 41 measures produce at fair value less costs to sell at that point. After harvest, the produce is within Ind AS 2. Its cost for Ind AS 2 is that Ind AS 41 amount (fair value less costs to sell at harvest), unless the producer measures it at NRV under well-established industry practice, as explained next.

The standard also does not apply to the measurement of inventories held by two groups. First, producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, but only to the extent they measure at net realisable value under well-established industry practice. If a producer does not measure that way, post-harvest produce is measured under Ind AS 2 at cost, which equals the Ind AS 41 fair value less costs to sell at harvest. Second, commodity broker-traders who measure inventories at fair value less costs to sell. The standard states the profit-or-loss rule for both groups: changes in NRV (for the producers) and changes in fair value less costs to sell (for the broker-traders) are recognised in profit or loss in the period of the change. Disclosure and other requirements of the standard still need care in a case.

Two measures are easy to mix up. Net realisable value (NRV) is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. It is entity-specific. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date (Ind AS 113). It is market-based. NRV may differ from fair value less costs to sell.

Key rules to remember

Definition of inventories
Inventories = assets (a) held for sale in the ordinary course of business, (b) in the process of production for such sale, or (c) materials or supplies to be consumed in production or in rendering services
Test all three limbs. Purpose of holding is the deciding factor.
Net realisable value
NRV = Estimated selling price in the ordinary course of business − Estimated costs of completion − Estimated costs necessary to make the sale
Entity-specific value. Costs of completion apply only to unfinished goods.
Fair value
Fair value = price received to sell an asset in an orderly transaction between market participants at the measurement date
Market-based, not entity-specific. Defined in Ind AS 113.
Fair value less costs to sell
Fair value less costs to sell = Fair value − Costs necessary to make the sale
Used by commodity broker-traders. Changes go to profit or loss in the period of change.
Items excluded from the scope of Ind AS 2
Construction contract WIP (Ind AS 115); financial instruments (Ind AS 32/107/109); biological assets and agricultural produce at the point of harvest (Ind AS 41)
Learn these three as a fixed list. Produce is excluded only at the point of harvest. Ind AS 2 applies to it after harvest.
Items outside Ind AS 2 measurement only
Producers of agricultural and forest products, agricultural produce after harvest, and minerals, only where they measure at NRV under well-established industry practice; commodity broker-traders (fair value less costs to sell)
Otherwise post-harvest produce is under Ind AS 2, with cost equal to Ind AS 41 fair value less costs to sell at harvest. Changes in NRV or in fair value less costs to sell go to profit or loss in the period of change. Other parts of Ind AS 2, such as disclosure, still matter.

How to solve Ind AS 2 Scope and Definitions of Inventories questions

Use this order for any scope or definition question on Ind AS 2.

  1. 1Identify the item and the entity: manufacturer, trader, farmer, miner, broker-trader, builder or service provider.
  2. 2Ask why the item is held: sale in ordinary course, production for sale, or consumption in production or services. If none, it is not inventory.
  3. 3Check the three scope exclusions: construction contract WIP, financial instruments, and biological assets and agricultural produce at the point of harvest. Produce after harvest is within Ind AS 2.
  4. 4Check the two measurement exemptions: producers using NRV by industry practice, and commodity broker-traders using fair value less costs to sell.
  5. 5If Ind AS 2 applies fully, name the standard's measurement rule (lower of cost and NRV) and compute NRV if figures are given.
  6. 6Where fair value is mentioned, state that it is market-based under Ind AS 113 and contrast it with entity-specific NRV.
  7. 7Write the conclusion in provision, facts and conclusion form, naming the Ind AS that governs the item.

Quickest way: Purpose, list, measure

When to use it: For 2-mark or MCQ scope questions where you have under two minutes.

  1. Purpose: is it for sale, in production for sale, or consumed in production? If not, think PPE or investment property.
  2. List: is it construction WIP, a financial instrument or an agricultural biological asset or harvest-point produce? If so, Ind AS 2 does not apply. Produce after harvest is within Ind AS 2.
  3. Measure: is the holder a commodity broker-trader or a producer under industry practice? If so, Ind AS 2 measurement does not apply; use fair value less costs to sell or NRV respectively, with changes recognised in profit or loss in the period of the change.

Common mistakes in Ind AS 2 Scope and Definitions of Inventories

  • Treating all assets held by a trader as inventories.

    Students match the item to the business rather than to the purpose of holding.

    Fix: Ask why the specific item is held. A computer used in the office is PPE even in a computer dealer's books.

  • Saying commodity broker-traders are completely outside Ind AS 2.

    The exemption is remembered as a scope exclusion.

    Fix: Only the measurement requirements are excluded. They use fair value less costs to sell, with changes in profit or loss.

  • Treating NRV and fair value less costs to sell as always equal.

    Both look like selling price minus costs.

    Fix: NRV is entity-specific. Fair value is what market participants would pay. They can differ, for example where the entity has a fixed-price contract.

  • Applying Ind AS 2 to construction contract WIP.

    The word 'work in progress' suggests inventories.

    Fix: WIP arising under construction contracts is excluded. Ind AS 115 governs it.

  • Deducting costs of completion for finished goods when computing NRV.

    The formula is memorised without its condition.

    Fix: Deduct costs of completion only for items still to be completed. Always deduct costs necessary to make the sale.

  • Treating agricultural produce at harvest as inventory at cost.

    Harvested crop looks like stock.

    Fix: At the point of harvest, Ind AS 41 measures produce at fair value less costs to sell. After harvest, Ind AS 2 applies and that value is the cost, unless the producer measures at NRV under well-established industry practice.

Worked examples

Example 1

Case: Shree Ltd is an Ind AS company. At the reporting date it holds: (a) steel bars held for sale by its trading division; (b) a delivery truck used by that division; (c) work in progress on a bridge being built under a contract with a state agency; (d) quoted shares held for short-term trading. State which items fall under Ind AS 2.

Show the solution
  1. Item (a): steel bars are held for sale in the ordinary course of business. They meet the definition of inventories.
  2. Item (b): the truck is held for use in delivering goods, not for sale. It is PPE under Ind AS 16.
  3. Item (c): WIP under a construction contract is excluded from Ind AS 2. Ind AS 115 applies.
  4. Item (d): quoted shares are financial instruments, excluded from Ind AS 2. Ind AS 109 applies.

Answer: Only item (a), the steel bars, is inventory under Ind AS 2. The truck is PPE (Ind AS 16), the bridge WIP is under Ind AS 115, and the shares are under Ind AS 109.

Example 2

Case: Kaveri Ltd has 1,000 units of a partly finished product. Its own estimated selling price after completion is ₹500 per unit. Estimated further cost to complete is ₹120 per unit. Selling costs are ₹30 per unit. Compute the NRV per unit and in total. Then explain how this differs from fair value.

Show the solution
  1. NRV per unit = estimated selling price − costs of completion − costs necessary to make the sale.
  2. NRV per unit = ₹500 − ₹120 − ₹30 = ₹350.
  3. Total NRV = ₹350 × 1,000 = ₹3,50,000.
  4. NRV is entity-specific. It uses Kaveri Ltd's own expected selling price of ₹500 and its own completion and selling costs.
  5. Fair value is different. Under Ind AS 113, it is the price market participants would pay to buy the partly finished unit in its current condition, in an orderly transaction at the measurement date. It is market-based.
  6. Fair value of the partly finished unit is not found by deducting completion costs from the finished product price. The case gives no exit price for the unit in its current condition, so no fair value can be computed from these figures.

Answer: NRV is ₹350 per unit, or ₹3,50,000 in total. It is entity-specific. Fair value is a market-participant exit price for the item in its current condition and is not derived by deducting completion costs from the finished product price.

Exam tips

  • In MCQs, scan the case for the purpose of holding first. Many options are built on PPE versus inventory confusion.
  • Remember the three scope exclusions as a list: Ind AS 115 WIP, financial instruments, and Ind AS 41 biological assets and produce at the point of harvest.
  • When a question names a commodity broker-trader, write that measurement is at fair value less costs to sell with changes in profit or loss.
  • For the NRV versus fair value difference, always use the terms entity-specific and market-based. These earn the marks.

Practice questions from Ind AS 2 Inventories

Ind AS 2 Scope and Definitions of Inventories in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Ind AS 2 Scope and Definitions of Inventories: frequently asked questions

What is excluded from the scope of Ind AS 2?

Construction contract WIP, financial instruments, and biological assets related to agricultural activity and agricultural produce at the point of harvest are excluded. Separately, the measurement requirements do not apply to certain producers using NRV and to commodity broker-traders using fair value less costs to sell.

What is the difference between NRV and fair value in Ind AS 2?

NRV is the entity's own estimated selling price less costs of completion and costs to sell. Fair value is the price market participants would pay in an orderly transaction at the measurement date. NRV is entity-specific while fair value is market-based.

How do commodity broker-traders measure inventories?

They measure inventories at fair value less costs to sell. Changes in that value are recognised in profit or loss in the period of the change.

Is spare parts stock always inventory?

No. Spares used in production or held for sale can be inventory. Major spares that the entity expects to use for more than one period and that meet the PPE definition are treated under Ind AS 16.