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Corporate Accounting and Auditing · Inventories (Ind AS 2)

Ind AS 2: Recognition as Expense, Disclosures and Problems

Updated 10 October 2026 · Fact-checked

Under Ind AS 2, when inventories are sold, their carrying amount becomes an expense in the period the related revenue is recognised. Write-downs to NRV and losses are expensed when they occur. To solve problems, compute cost, compare with NRV, expense the lower-of-cost-or-NRV difference, and then give the required disclosures.

Understand Recognition as Expense, Disclosures and Practical Problems

Inventory is an asset until it is used up or sold. Ind AS 2 says an asset is carried forward at cost (or lower NRV) until the related revenue is recognised. Only then does it become an expense. This is the matching idea: cost of goods sold appears in the same period as the sales revenue.

Paragraph 34 gives three rules. First, on sale, the carrying amount of the inventory is expensed in the period the revenue is recognised. Second, any write-down to net realisable value (NRV) and all losses of inventories are expensed in the period the write-down or loss occurs. Third, a reversal of a write-down (because NRV has risen) is not income. It is shown as a reduction in the amount of inventories recognised as an expense in the period of reversal.

Sometimes inventory is not sold but moved into another asset. For example, materials used in building your own plant. Paragraph 35 says such inventory is recognised as an expense over the useful life of that asset, usually through depreciation.

Disclosure is the second half of the topic. Paragraph 36 lists what the financial statements must show: the accounting policy and cost formula, total carrying amount and classifications, inventories at fair value less costs to sell, the amount expensed in the period, write-downs, reversals and the reasons for them, and inventories pledged as security. Paragraph 37 says common classifications are merchandise, production supplies, materials, work in progress and finished goods.

Indian companies present expenses by nature only. Ind AS 1 requires nature-wise classification, so the function-wise paragraph 38 of IAS 2 is deleted in Ind AS 2. Under the nature-wise format, paragraph 39 requires disclosure of the costs expensed for raw materials and consumables, labour and other costs, together with the net change in inventories for the period.

Key rules to remember

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.

How to solve Recognition as Expense, Disclosures and Practical Problems questions

Use this order for any numerical question on inventory expense, valuation or disclosure.

  1. 1Read the question and list each item of inventory with units, cost and expected selling price and costs to complete or sell.
  2. 2Apply the cost formula asked for (FIFO or weighted average) to find the cost of closing stock and of items sold.
  3. 3Find NRV for each item: estimated selling price less estimated costs of completion and costs necessary to make the sale. Use the contract price for quantities covered by firm sales contracts, and general selling prices for the excess (para 31).
  4. 4Take the lower of cost and NRV for each item. The difference is the write-down, expensed in that period.
  5. 5If an earlier write-down exists and NRV has risen, compute the reversal, limited to the original write-down, and treat it as a reduction in the inventory expense.
  6. 6Compute the expense for the period: cost of items sold plus write-downs and losses, less reversals.
  7. 7Prepare the disclosure note: policy and cost formula, total and classified carrying amounts, amount expensed, write-downs, reversals with reasons, and amount pledged as security.

Quickest way: Lower-of-cost-or-NRV table

When to use it: Use it for any multi-item valuation question where time is short.

  1. Draw columns: Item, Cost, NRV, Lower value.
  2. Fill NRV as selling price minus further costs. Do not subtract anything already in cost.
  3. Pick the lower figure row by row and total the last column.
  4. Write-down = total cost minus total of the lower values. Show it as a separate line.
  5. Close with the disclosure points the question asks for, using the para 36 list as a checklist.

Common mistakes in Recognition as Expense, Disclosures and Practical Problems

  • Valuing the total inventory against total NRV instead of item by item.

    It feels faster, and gains on one item seem to offset losses on another.

    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.

    Students link a gain with 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.

  • Reversing a write-down above the original cost.

    NRV rises sharply and students record the full rise.

    Fix: Carrying amount cannot exceed cost. Reverse only up to the original write-down.

  • Ignoring costs necessary to make the sale when computing NRV.

    Students use the selling price directly.

    Fix: Always deduct estimated costs of completion and selling costs from the selling price.

  • Using function-wise (cost of sales) disclosure in the Ind AS answer.

    IAS and older textbooks allow function-wise presentation.

    Fix: Ind AS 1 needs nature-wise classification. Disclose raw material and consumables, labour, other costs and the net change in inventories.

  • Forgetting disclosure items such as inventories pledged as security or circumstances of a reversal.

    Students stop after the numbers.

    Fix: Tick off para 36 (a) to (h) one by one in the note.

Worked examples

Example 1

Sharma Traders Ltd has three items at year end. Item A: cost ₹2,40,000, estimated selling price ₹3,00,000, selling costs ₹20,000. Item B: cost ₹1,80,000, selling price ₹1,70,000, selling costs ₹10,000. Item C: cost ₹90,000, selling price ₹1,20,000, selling costs ₹15,000. Compute the closing inventory value and the write-down to be expensed.

Show the solution
  1. Item A NRV = 3,00,000 − 20,000 = ₹2,80,000. Cost is ₹2,40,000. Lower value is ₹2,40,000.
  2. Item B NRV = 1,70,000 − 10,000 = ₹1,60,000. Cost is ₹1,80,000. Lower value is ₹1,60,000, so write-down is ₹20,000.
  3. Item C NRV = 1,20,000 − 15,000 = ₹1,05,000. Cost is ₹90,000. Lower value is ₹90,000.
  4. Closing inventory = 2,40,000 + 1,60,000 + 90,000 = ₹4,90,000.
  5. Total cost = 2,40,000 + 1,80,000 + 90,000 = ₹5,10,000. Write-down = 5,10,000 − 4,90,000 = ₹20,000.
  6. The ₹20,000 is expensed in the period the write-down occurs (para 34). Item A's excess NRV is not recognised.

Answer: Closing inventory is ₹4,90,000 and the write-down expensed is ₹20,000 (all on Item B).

Example 2

Verma Industries Ltd had opening inventory of ₹3,00,000. Purchases were ₹12,00,000 and closing inventory at cost was ₹4,00,000. Within closing inventory, goods costing ₹50,000 had been written down last year to ₹30,000. This year their NRV has risen to ₹60,000. Compute the closing inventory carrying amount and the cost of goods sold, and state the treatment of the reversal. Ignore other costs.

Show the solution
  1. Closing inventory at cost includes the goods at ₹50,000. They were carried at ₹30,000 after the write-down, so cost of other items = 4,00,000 − 50,000 = ₹3,50,000.
  2. Revised NRV of the affected goods is ₹60,000, which exceeds cost of ₹50,000. The carrying amount is capped at cost, so it is ₹50,000.
  3. Reversal = 50,000 − 30,000 = ₹20,000, which equals the original write-down.
  4. Closing inventory carrying amount = 3,50,000 + 50,000 = ₹4,00,000.
  5. Opening inventory was stated at carrying amount including the earlier write-down, so opening of ₹3,00,000 already reflects ₹30,000 for these goods.
  6. Cost of goods sold = 3,00,000 + 12,00,000 − 4,00,000 = ₹11,00,000.
  7. The ₹20,000 reversal is not income. It is shown as a reduction in the inventories expensed in this period (para 34), and its circumstances are disclosed (para 36(f), (g)).

Answer: Closing inventory is ₹4,00,000 and cost of goods sold is ₹11,00,000. The ₹20,000 reversal reduces the inventory expense and the reason for it must be disclosed.

Exam tips

  • In theory questions, quote the three rules of para 34 in order: sale, write-down and losses, reversal. Each point earns a step mark.
  • For disclosure questions, write the list (a) to (h) of para 36 as short bullet points. Missing one costs marks.
  • In MCQs, watch for the trap that a reversal is income or that function-wise presentation is allowed under Ind AS. Both are wrong.
  • Always show the NRV workings separately in numerical answers, so partial marks are available even if the final figure is wrong.
  • State the cost formula used. Ind AS 2 permits FIFO or weighted average, and the policy itself must be disclosed.

Practice questions from Inventories (Ind AS 2)

Recognition as Expense, Disclosures and Practical Problems in other exams

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

Recognition as Expense, Disclosures and Practical Problems: frequently asked questions

When is inventory recognised as an expense under Ind AS 2?

When inventories are sold, their carrying amount is expensed in the period the related revenue is recognised. Write-downs to NRV and all losses are expensed in the period they occur. Inventory moved into another asset, such as self-constructed plant, is expensed over that asset's useful life.

What are the main disclosure requirements of Ind AS 2?

You disclose the accounting policies and cost formula, total carrying amount and its classifications, inventories at fair value less costs to sell, the amount expensed, write-downs, reversals and their reasons, and inventories pledged as security. These are in para 36 of the standard.

How is a reversal of an inventory write-down shown?

It is shown as a reduction in the amount of inventories recognised as an expense in the period of the reversal. It is not shown as separate income. The reversal is limited to the original write-down, so the carrying amount never exceeds cost.

Does Ind AS 2 allow function-wise presentation of expenses?

No. Ind AS 1 requires nature-wise classification, so the function-wise paragraph of IAS 2 is deleted. You disclose raw materials and consumables, labour and other costs along with the net change in inventories.