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Financial Reporting · Ind AS 2 Inventories

Net Realisable Value and Write-down of Inventories (Ind AS 2)

Updated 5 October 2026 · Fact-checked

Under Ind AS 2, inventories are measured at the lower of cost and net realisable value (NRV). NRV is the estimated selling price in the ordinary course of business less estimated costs of completion and costs necessary to make the sale. Compare cost with NRV item by item, write down any excess of cost, and reverse the write-down if NRV later rises, up to the original write-down.

Understand Net Realisable Value and Write-down of Inventories

Inventory is an asset because it will bring in cash when sold. It should not be carried at more than the cash it is expected to bring in. So Ind AS 2 says: measure inventories at the lower of cost and net realisable value. If cost is higher, you write the inventory down and charge the loss in the period of the write-down.

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. It is not fair value, which is a market-participant price. NRV reflects what this entity expects to realise from this inventory.

Estimates of NRV use the most reliable evidence available when you make them. This includes price or cost changes after the reporting date, to the extent they confirm conditions existing at the reporting date. The purpose of the inventory also matters. For inventory held to fulfil a firm sale or service contract, use the contract price. If the contract covers less than the quantity held, the excess is valued on general selling prices.

Materials and other supplies held for use in production are not written down below cost if the finished products they go into are expected to sell at or above cost. If a fall in the price of materials indicates that the cost of the finished products will exceed NRV, the materials are written down to NRV. Here, the best available measure of the materials' NRV is often their replacement cost.

NRV is assessed afresh at each reporting date. If the reason for an earlier write-down no longer exists, or there is clear evidence of an increase in NRV because of changed economic circumstances, you reverse the write-down. The reversal is limited to the amount of the original write-down, so the new carrying amount is the lower of cost and the revised NRV. The reversal is recognised as a reduction in the inventory expense in the period in which it occurs.

Key rules to remember

Measurement rule
Carrying amount = lower of (Cost, NRV)
Applied item by item, or to groups of similar items. Do not net gains on one item against losses on another.
Net realisable value
NRV = Estimated selling price − Estimated costs of completion − Estimated costs necessary to make the sale
Use the ordinary-course selling price, less only costs still to be incurred.
Write-down
Write-down = Cost − NRV (only if Cost > NRV)
Recognised as an expense in the period of the write-down.
Materials for production
Write down materials to NRV only if finished goods NRV < finished goods cost
Replacement cost of the materials is often the best measure of their NRV.
Reversal
Reversal = lower of (Original write-down, Revised NRV − Written-down carrying amount)
Credited to inventory expense in the period of reversal. Carrying amount never exceeds original cost.

How to solve Net Realisable Value and Write-down of Inventories questions

Use this sequence for any NRV question, whether it is a computation or a case on raw materials or reversal.

  1. 1List each item or group of similar items with its cost. Include only costs that qualify under Ind AS 2.
  2. 2Identify the purpose: held for a firm contract, general sale, or use in production. This decides which selling price to use.
  3. 3Compute NRV: estimated selling price less costs of completion and costs to make the sale. Include costs still to be incurred only.
  4. 4For raw materials, first test the finished product. If its NRV is at or above cost, keep materials at cost. If not, write materials down to NRV, using replacement cost as the guide.
  5. 5Compare cost and NRV for each item. Take the lower. Write-down = cost − NRV where cost is higher.
  6. 6Use only evidence about conditions at the reporting date, including later events that confirm them.
  7. 7If a prior write-down exists, check for increased NRV. Reverse only up to the original write-down and credit inventory expense.
  8. 8State the final carrying amount, the P&L charge or credit, and the disclosure of amounts written down or reversed.

Quickest way: Item-wise lower-of test

When to use it: Use for short numerical questions with several items and limited time.

  1. Write three columns: Cost, NRV, Lower.
  2. Compute NRV as selling price minus further costs and selling costs.
  3. Tick the lower in each row. Add only the lower figures.
  4. For raw materials, check the finished product first. If it is profitable, ignore the materials' price fall.
  5. Write-down = total cost minus total of the lower figures, calculated row by row, not on totals.

Common mistakes in Net Realisable Value and Write-down of Inventories

  • Comparing total cost with total NRV of all items instead of item by item.

    It feels quicker and students treat inventory as one pool.

    Fix: Compare each item or group of similar items. Do not set off a gain on one against a loss on another.

  • Ignoring estimated selling costs when computing NRV.

    Students use the selling price as NRV.

    Fix: Always deduct costs of completion and costs necessary to make the sale, such as commission and packing for sale.

  • Writing down raw materials just because their market price has fallen.

    Students apply the lower-of rule to materials in isolation.

    Fix: Test the finished goods first. Write materials down only if the finished goods are expected to sell below cost.

  • Using the contract price for the entire quantity held when the contract covers only part.

    The contract price appears in the question and is applied everywhere.

    Fix: Use the contract price only for the contracted quantity. Use general selling price for the excess.

  • Reversing a write-down above the original cost.

    Students add the full rise in NRV to the carrying amount.

    Fix: Cap the reversal at the original write-down, so the carrying amount is never above cost.

  • Including post-year-end price changes that reflect new conditions.

    Students treat any later price as relevant evidence.

    Fix: Use later events only if they confirm conditions existing at the reporting date.

Worked examples

Example 1

At 31 March 2027, Arya Ltd has three products. Cost and estimated selling price: Product A cost ₹4,00,000, selling price ₹5,00,000, selling costs ₹20,000. Product B cost ₹6,00,000, selling price ₹5,80,000, selling costs ₹30,000. Product C cost ₹3,00,000, selling price ₹4,20,000, further completion cost ₹40,000, selling costs ₹10,000. Find the value of closing inventory.

Show the solution
  1. Product A: NRV = 5,00,000 − 20,000 = ₹4,80,000. Cost is ₹4,00,000. Lower is ₹4,00,000.
  2. Product B: NRV = 5,80,000 − 30,000 = ₹5,50,000. Cost is ₹6,00,000. Lower is ₹5,50,000. Write-down = ₹50,000.
  3. Product C: NRV = 4,20,000 − 40,000 − 10,000 = ₹3,70,000. Cost is ₹3,00,000. Lower is ₹3,00,000.
  4. Total = 4,00,000 + 5,50,000 + 3,00,000 = ₹12,50,000.
  5. Gains on A and C are not offset against the loss on B.

Answer: Closing inventory is ₹12,50,000. A write-down of ₹50,000 on Product B is charged to profit or loss.

Example 2

Meru Ltd makes steel fittings. At 31 March 2027 it holds raw steel costing ₹8,00,000. The market price of steel has fallen and its replacement cost is ₹7,00,000. Finished fittings made from this steel would have a cost of ₹12,00,000 (including the steel at ₹8,00,000) and are expected to sell for ₹11,00,000 with selling costs of ₹20,000. Should the steel be written down, and by how much?

Show the solution
  1. Test the finished product first. NRV of fittings = 11,00,000 − 20,000 = ₹10,80,000.
  2. Cost of fittings is ₹12,00,000, so NRV is below cost. The fall in steel price indicates that finished goods will not recover cost.
  3. Therefore the steel must be written down to NRV. Replacement cost of ₹7,00,000 is the best available measure of the steel's NRV.
  4. Write-down = 8,00,000 − 7,00,000 = ₹1,00,000.
  5. If the fittings had been expected to sell at or above ₹12,00,000 net of selling costs, no write-down would be needed.

Answer: Write down the steel by ₹1,00,000 to ₹7,00,000, and charge it to profit or loss.

Exam tips

  • In case-scenario MCQs, check purpose first: firm contract, general sale or production use. The selling price you use depends on it.
  • For raw materials, always start with the finished product test before touching the materials' value.
  • Show NRV working line by line, even when the answer is obvious. Marks are given for each component.
  • In reversal questions, state the cap clearly: reversal is limited to the original write-down.
  • Mention that the write-down is an expense and the reversal reduces inventory expense in the period it occurs.

Practice questions from Ind AS 2 Inventories

Net Realisable Value and Write-down 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.

Net Realisable Value and Write-down of Inventories: frequently asked questions

Is NRV the same as fair value under Ind AS 2?

No. NRV is an entity-specific amount the entity expects to realise from selling the inventory in the ordinary course. Fair value is a market-participant exit price. They may differ, for example because of entity-specific costs to sell.

Are raw materials always written down when their price falls?

No. Materials held for production are not written down below cost if the finished products are expected to sell at or above cost. Write them down only when the finished goods' NRV falls below their cost. Replacement cost is then often the best measure of the materials' NRV.

Can a write-down of inventory be reversed?

Yes. If the circumstances that caused the write-down no longer exist, or there is clear evidence of increased NRV, you reverse it. The reversal is limited to the original write-down. It is recognised as a reduction in the inventory expense in that period.

Is the lower-of-cost-and-NRV test applied item by item?

Normally yes. Items may be grouped only if they are similar, such as product lines with similar purpose and market. Do not apply the test to a whole classification like all finished goods or all inventory of an industry.