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Advanced Accounting · AS 2 Valuation of Inventory

Net Realisable Value and Lower of Cost or NRV under AS 2

Updated 4 October 2026 · Fact-checked

Under AS 2, inventory is valued at the lower of cost and net realisable value (NRV). NRV is estimated selling price less estimated costs of completion and costs needed to make the sale. Compare cost and NRV item by item, take the lower, and write down any shortfall as an expense.

Understand Net Realisable Value and Lower of Cost or NRV

Inventory is a current asset, so it should not be shown at more than the cash you expect to get from it. Cost is what you paid or spent to bring it to its present location and condition. If the expected cash is lower than cost, you have already lost value. AS 2 asks you to recognise that loss now. This is prudence in action.

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. Note that NRV is an entity-specific amount after selling costs, not just the market price.

Cost may become unrecoverable for several reasons: items are damaged, wholly or partly obsolete, selling prices have fallen, or the costs of completion or selling have risen. The write-down is normally done item by item. Where items are similar or related, such as items in the same product line, grouping them can be appropriate. It is not appropriate to write down a whole class such as all finished goods, or all inventory in a business segment.

Estimates of NRV are based on the most reliable evidence available when you make the estimate, including price changes after the year end to the extent they confirm conditions existing at the year end.

Raw 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 be sold at or above cost. If a fall in raw material price indicates that the finished goods cost will exceed NRV, the raw materials are written down to NRV. In that case, the replacement cost of the raw materials may be the best available measure of their NRV.

What happens in a later period? AS 2 does not contain an explicit paragraph on reversal of write-downs. In practice, NRV is re-assessed at each balance sheet date. If the earlier write-down is no longer needed, the item is carried at the lower of cost and the revised NRV. So the carrying amount can rise again, but never above original cost. An explicit reversal requirement exists in Ind AS 2, not in AS 2.

Key rules to remember

Net realisable value
NRV = Estimated selling price − Estimated costs of completion − Estimated costs necessary to make the sale
Use selling price in the ordinary course of business. Costs of completion apply to work in progress and semi-finished goods.
Inventory valuation rule
Carrying amount = Lower of (Cost, NRV)
Apply item by item, or to similar or related items grouped together where appropriate. Never offset a gain on one item against a loss on another.
Write-down amount
Write-down = Cost − NRV, only where NRV < Cost
Charged as an expense in the period of the write-down.
Raw materials rule
If finished goods are expected to sell at or above cost: raw materials stay at cost. Otherwise: raw materials at lower of cost and NRV (replacement cost may be the best measure of NRV)
Test the finished product, not the raw material price alone.
Reversal limit
Increase on re-assessment = Lower of (cost, revised NRV) − Carrying amount after the earlier write-down
AS 2 has no explicit reversal paragraph. NRV is re-assessed at each balance sheet date, and the item is carried at the lower of cost and revised NRV. Explicit reversal is in Ind AS 2. You can never carry the item above original cost.

How to solve Net Realisable Value and Lower of Cost or NRV questions

Use this sequence for any NRV or lower-of-cost question.

  1. 1List each item (or each similar group) with its cost. Use cost as determined under AS 2 after applying FIFO or weighted average, including conversion costs for WIP.
  2. 2Find the estimated selling price for each item. Use the price expected in the ordinary course of business and apply any post year-end evidence that confirms year-end conditions.
  3. 3Deduct the estimated costs of completion, if any, and the estimated selling costs such as commission and packing for sale. This gives NRV.
  4. 4Compare cost with NRV item by item. Choose the lower for each item.
  5. 5For raw materials, first test the finished goods made from them. If finished goods will sell at or above cost, keep raw materials at cost. If not, value raw materials at the lower of cost and NRV, using replacement cost if given.
  6. 6Compute the write-down as the sum of the shortfalls only. Do not net off items where NRV exceeds cost.
  7. 7If a question mentions earlier write-downs, re-assess NRV at the new balance sheet date. AS 2 has no explicit reversal paragraph, so carry the item at the lower of cost and the revised NRV, and show the increase over the written-down value as the difference. Never go above cost.
  8. 8Show the final inventory value and the effect on profit clearly.

Quickest way: Table method: Cost | NRV | Lower

When to use it: Use it in any problem with several items, in MCQs and in the written answer.

  1. Draw four columns: item, cost, NRV, lower of the two. Fill NRV with selling price minus completion and selling costs.
  2. Circle the smaller number in each row and total the circled amounts.
  3. For MCQs, eliminate options that equal total cost or total NRV. These are the typical traps, because the answer usually mixes both.
  4. For raw materials, ask one question: will the finished goods sell at or above cost? If yes, ignore raw material price falls.
  5. In the written answer, show the NRV working per item, state the rule in one line, and give the final inventory and write-down. This earns step marks even if one figure is wrong.

Common mistakes in Net Realisable Value and Lower of Cost or NRV

  • Ignoring selling costs and completion costs when computing NRV.

    Students treat NRV as simply the selling price or market price.

    Fix: Always subtract completion costs and costs necessary to make the sale, such as commission, before comparing with cost.

  • Netting gains on some items against losses on others.

    Students compare total cost with total NRV to save time.

    Fix: Compare item by item, or by similar groups. Items with NRV above cost stay at cost, and only shortfalls are written down.

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

    Students apply the rule to the raw material in isolation.

    Fix: Check the finished goods first. If they will sell at or above cost, hold the raw materials at cost.

  • Valuing inventory above cost when NRV is higher.

    Students think the higher figure shows true value.

    Fix: Cost is the ceiling. Unrealised gains are never recognised in inventory under AS 2.

  • Taking the full recovery in NRV as the increase when an earlier write-down is no longer needed, or quoting this as an explicit AS 2 reversal rule.

    Students take the full recovery in NRV as the adjustment, and they carry over the reversal wording from Ind AS 2.

    Fix: AS 2 has no explicit reversal paragraph. Re-assess NRV at the balance sheet date and carry the item at the lower of cost and revised NRV. The increase is the difference from the written-down value and cannot take the item above cost. The explicit reversal rule is in Ind AS 2.

  • Using NRV for WIP without deducting costs still to be incurred to complete it.

    Students think only finished goods need NRV adjustments.

    Fix: For WIP, estimated selling price of the finished item minus costs to complete and sell gives NRV. Compare it with cost incurred to date.

Worked examples

Example 1

At the year end, a trader holds three items. Item A: cost ₹80,000, estimated selling price ₹1,00,000, selling expenses ₹5,000. Item B: cost ₹1,20,000, estimated selling price ₹1,30,000, selling expenses ₹15,000. Item C: cost ₹60,000, estimated selling price ₹50,000, selling expenses ₹2,000. Compute the value of closing inventory and the write-down.

Show the solution
  1. NRV of A = 1,00,000 − 5,000 = ₹95,000. Cost is ₹80,000. Lower is ₹80,000.
  2. NRV of B = 1,30,000 − 15,000 = ₹1,15,000. Cost is ₹1,20,000. Lower is ₹1,15,000. Write-down = ₹5,000.
  3. NRV of C = 50,000 − 2,000 = ₹48,000. Cost is ₹60,000. Lower is ₹48,000. Write-down = ₹12,000.
  4. Closing inventory = 80,000 + 1,15,000 + 48,000 = ₹2,43,000.
  5. Total write-down = 5,000 + 12,000 = ₹17,000. The gain of ₹15,000 on A is not recognised and is not offset.

Answer: Closing inventory is valued at ₹2,43,000. The write-down charged to profit is ₹17,000 (total cost ₹2,60,000 less ₹2,43,000).

Example 2

A manufacturer holds raw material costing ₹3,00,000 (current replacement cost ₹2,40,000), to be used in making 1,000 units of a product. Cost of conversion for these units is ₹1,00,000. Selling expenses are ₹20 per unit. (a) The product is expected to sell at ₹450 per unit. Value the raw material. (b) Suppose instead the selling price is ₹300 per unit with the same selling expenses. Value the raw material, taking replacement cost as its NRV.

Show the solution
  1. Cost of finished goods = 3,00,000 + 1,00,000 = ₹4,00,000, or ₹400 per unit.
  2. (a) NRV of finished goods = 450 − 20 = ₹430 per unit, which is above cost of ₹400 per unit. So the finished goods are not written down.
  3. (a) Because finished goods are expected to sell at or above cost, the raw material is not written down, even though its replacement cost has fallen to ₹2,40,000. It stays at cost of ₹3,00,000.
  4. (b) NRV of finished goods = 300 − 20 = ₹280 per unit, which is below cost of ₹400 per unit. So the raw material must be tested.
  5. (b) Raw material is valued at the lower of cost (₹3,00,000) and NRV (replacement cost ₹2,40,000) = ₹2,40,000. Write-down = ₹60,000.
  6. Note: the raw material stays at cost if the NRV of the finished goods is at least ₹400 per unit.

Answer: (a) Raw material is valued at ₹3,00,000, with no write-down, because finished goods NRV of ₹430 per unit is above cost. (b) Raw material is written down to its replacement cost of ₹2,40,000, a write-down of ₹60,000, because finished goods NRV of ₹280 per unit is below cost.

Exam tips

  • In MCQs, the usual traps are total cost, total NRV, or a netted figure. Work item by item and add the lower values.
  • Always show the NRV calculation line by line in the written answer. Examiners award marks for the working even if the final figure differs.
  • For raw material questions, state the test in words: finished goods are or are not expected to sell at or above cost. Then apply the rule.
  • If the question gives post year-end selling prices, use them only when they confirm conditions that existed at the year end.
  • Mention prudence and the rule that write-downs go to the profit and loss statement in the period they occur. If NRV is re-assessed later and the earlier write-down is no longer needed, state that the item is carried at the lower of cost and revised NRV, and that the explicit reversal rule is in Ind AS 2, not AS 2.

Practice questions from AS 2 Valuation of Inventory

Net Realisable Value and Lower of Cost or NRV 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 Lower of Cost or NRV: frequently asked questions

What is the difference between NRV and market price?

Market price is the price at which an item can be sold. NRV is the estimated selling price in the ordinary course of business less costs of completion and costs necessary to make the sale. So NRV is usually lower than the selling price.

Do I apply lower of cost or NRV to total inventory or to each item?

Apply it item by item. Similar or related items can be grouped where that is appropriate. Do not apply it to a whole class of inventory, such as all finished goods, and do not offset gains on one item with losses on another.

When can raw materials be valued below cost under AS 2?

Only when the finished products they go into are expected to sell below cost. If the finished goods will sell at or above cost, the raw materials stay at cost even if their market price has dropped.

Can a write-down of inventory be reversed under AS 2?

AS 2 does not contain an explicit paragraph on reversal. NRV is re-assessed at each balance sheet date, and if the earlier write-down is no longer needed, the item is carried at the lower of cost and the revised NRV. It can never be carried above original cost. The explicit reversal requirement is in Ind AS 2.