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Corporate Accounting and Auditing · Inventories (Ind AS 2)

Ind AS 2 Lower of Cost and Net Realisable Value

Updated 10 October 2026 · Fact-checked

Ind AS 2 says you measure inventories at the lower of cost and net realisable value (NRV), item by item or in similar groups. NRV is the estimated selling price less estimated costs of completion and costs necessary to make the sale. If NRV is below cost, write down the difference as an expense.

Understand Measurement of Inventories: Cost and NRV

Inventories are assets you hold for sale, in production for sale, or as materials to be used in production. Ind AS 2 does not let you carry them above the amount you can expect to recover. So you compare two numbers for each item: cost and net realisable value (NRV). You carry the lower one.

Cost is what you worked out under the cost rules: purchase cost, conversion cost and other costs to bring the item to its present location and condition. NRV is a different idea. It 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. Selling costs here means costs that must be incurred to sell, such as commission and delivery to the customer.

If NRV is lower than cost, the inventory has lost value. You write it down to NRV and charge the loss to profit or loss in the period of the write-down. Cost is not written up if NRV is higher. Inventory never goes above cost.

NRV is reassessed 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 circumstances changed, 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 it occurs.

Two further points are often tested. Estimates of NRV use the most reliable evidence available at the reporting date, including price changes after the date that confirm conditions existing at the date. Materials held for use in production are not written down below cost if the finished goods they go into are expected to sell at or above cost. If the materials price has fallen and the finished goods will sell below cost, write the materials down to net realisable value, where replacement cost may be the best measure of NRV.

Key rules to remember

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.

How to solve Measurement of Inventories: Cost and NRV questions

Use this method for any question that gives cost and selling data and asks for the value of inventories at the reporting date.

  1. 1List each item or product line separately. Note its cost as given, after applying the correct cost rules.
  2. 2Find the estimated selling price for each item. Use the price expected in the ordinary course of business, not a distress price unless the facts say so.
  3. 3Deduct the estimated costs of completion, if the item is unfinished, and the estimated selling costs. This gives NRV.
  4. 4Compare cost and NRV for each item. Pick the lower figure as the carrying amount.
  5. 5Add the carrying amounts to get total inventories. Compute the write-down as total cost less total carrying amount.
  6. 6Check the effect of prior write-downs. If NRV has risen, reverse up to the original write-down, never above cost.
  7. 7For raw materials, test the finished goods first. Write materials down only if finished goods are expected to sell below cost.
  8. 8Show the journal or the statement of profit and loss effect, and state the figure shown in the balance sheet.

Quickest way: Table-and-minimum method

When to use it: Use for multi-item questions where time is short and you only need closing inventory value and write-down.

  1. Draw four columns: Item, Cost, NRV, Lower.
  2. Compute NRV in a side line: selling price less completion and selling costs.
  3. Tick the lower figure in each row and total only that column.
  4. Write-down = total of Cost column less total of Lower column.
  5. If asked about reversal, add one more column for the earlier carrying amount and take the difference, capped at the earlier write-down.

Common mistakes in Measurement of Inventories: Cost and NRV

  • Using selling price instead of NRV

    The question gives a selling price and students compare it straight with cost.

    Fix: Always deduct costs to complete and costs to sell first. Only then compare with cost.

  • Netting gains against losses across items

    Students total cost and total NRV and compare the two totals.

    Fix: Compare item by item. An item with NRV above cost stays at cost and cannot offset another item's write-down.

  • Writing inventory up above cost

    The NRV of an item is higher than cost and the student values it at NRV.

    Fix: Carry the lower figure. If NRV is higher, the carrying amount is cost.

  • Reversing more than the original write-down

    The student takes the full rise in NRV as the reversal.

    Fix: Cap the new carrying amount at original cost. The reversal cannot exceed the earlier write-down.

  • Writing down raw materials just because their price fell

    Students forget that materials are tested through the finished product.

    Fix: Check whether the finished goods will sell at or above cost. If yes, keep materials at cost.

  • Forgetting costs of completion for work in progress

    Students treat WIP like finished goods.

    Fix: Deduct the further cost to finish the item as well as the selling costs.

Worked examples

Example 1

At the reporting date, Kaveri Traders holds three products. Cost and estimated selling data are: Product A cost ₹4,00,000, selling price ₹4,50,000, selling costs ₹30,000. Product B cost ₹3,00,000, selling price ₹3,20,000, selling costs ₹40,000. Product C (unfinished) cost ₹2,00,000, selling price after completion ₹2,60,000, further cost to complete ₹50,000, selling costs ₹20,000. Find the value of inventories and the write-down.

Show the solution
  1. Product A: NRV = 4,50,000 − 30,000 = ₹4,20,000. Cost ₹4,00,000 is lower. Carry at ₹4,00,000.
  2. Product B: NRV = 3,20,000 − 40,000 = ₹2,80,000. NRV is lower than cost ₹3,00,000. Carry at ₹2,80,000. Write-down ₹20,000.
  3. Product C: NRV = 2,60,000 − 50,000 − 20,000 = ₹1,90,000. NRV is lower than cost ₹2,00,000. Carry at ₹1,90,000. Write-down ₹10,000.
  4. Total cost = 4,00,000 + 3,00,000 + 2,00,000 = ₹9,00,000.
  5. Total carrying amount = 4,00,000 + 2,80,000 + 1,90,000 = ₹8,70,000.
  6. Total write-down = 9,00,000 − 8,70,000 = ₹30,000, charged to profit or loss.

Answer: Inventories are valued at ₹8,70,000. The write-down of ₹30,000 is charged to profit or loss. Product A's gain of ₹20,000 is not set off.

Example 2

Mehta Industries had 1,000 units of an item costing ₹500 each at 31 March 2026. NRV was ₹420 per unit. At 31 March 2027 the same units are still held and, because demand recovered, NRV is ₹560 per unit. Show the carrying amount at both dates and the amount of reversal.

Show the solution
  1. 31 March 2026: cost = 1,000 × 500 = ₹5,00,000. NRV = 1,000 × 420 = ₹4,20,000.
  2. NRV is lower, so carrying amount = ₹4,20,000. Write-down = 5,00,000 − 4,20,000 = ₹80,000, charged to profit or loss.
  3. 31 March 2027: revised NRV = 1,000 × 560 = ₹5,60,000. Cost is ₹5,00,000.
  4. New carrying amount = lower of cost and NRV = ₹5,00,000.
  5. Reversal = 5,00,000 − 4,20,000 = ₹80,000, which equals the original write-down.
  6. The extra ₹60,000 of NRV over cost is not recognised. The reversal reduces the inventory expense of the year.

Answer: Carrying amount is ₹4,20,000 at 31 March 2026 and ₹5,00,000 at 31 March 2027. The reversal is ₹80,000, limited to the original write-down.

Exam tips

  • 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.
  • For raw materials questions, write the finished goods test first. Then conclude whether materials are written down.
  • Show the closing inventory figure and the write-down amount separately. Examiners usually ask for one or both.

Practice questions from Inventories (Ind AS 2)

Measurement of Inventories: Cost and NRV in other exams

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

Measurement of Inventories: Cost and NRV: frequently asked questions

What is net realisable value in Ind AS 2?

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 an entity-specific amount based on the best evidence at the reporting date.

Can inventory be valued above cost if NRV is higher?

No. Inventories are carried at the lower of cost and NRV. If NRV is higher than cost, you keep the item at cost and recognise no gain.

When is a write-down of inventory reversed?

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

Should the lower of cost and NRV be applied to total inventory or each item?

Normally you apply it item by item. Grouping is allowed only for items that are similar or related, such as the same product line. You should not compare the totals of unrelated items.