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Corporate Accounting and Auditing · Inventories (Ind AS 2)

Ind AS 2 Inventories: Scope and Definitions

Updated 10 October 2026 · Fact-checked

Ind AS 2 sets the accounting rules for inventories. Scope questions ask which holders are excluded from its measurement rules: producers of agricultural and forest products, agricultural produce after harvest, and minerals, and commodity broker-traders. Net realisable value (NRV) is the estimated selling price in the ordinary course less estimated costs of completion and costs necessary to make the sale. It is entity-specific, unlike fair value.

Understand Scope and Definitions under Ind AS 2

Ind AS 2 tells you how to account for inventories: what to record, at what amount, and when to charge it to profit or loss. Before any measurement, you must know two things: which holders of inventory the Standard's measurement rules apply to, and what the key terms mean. Exam questions on this topic test exactly that.

The Standard does not apply to the measurement of inventories held by two groups. The first is producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value in accordance with well-established practices in those industries. The second is commodity broker-traders who measure their inventories at fair value less costs to sell. In both cases, changes in value are recognised in profit or loss in the period of the change.

Note the exact conditions. The exclusion for the first group applies only to the extent inventories are measured at NRV under well-established industry practice. This happens, for example, when crops are harvested or minerals extracted and sale is assured under a forward contract or government guarantee, or when an active market exists and there is a negligible risk of failure to sell. For the second group, the exclusion applies only when they measure at fair value less costs to sell. Broker-traders buy or sell commodities for others or on their own account, mainly to sell in the near future and earn from price fluctuations or broker-trader margin. These inventories are excluded from only the measurement requirements of the Standard, not from everything in it.

Net realisable value 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 the net amount the entity expects to realise from selling the inventory. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date (see Ind AS 113).

The key difference: NRV is entity-specific, while fair value is not. Fair value reflects the price in the principal (or most advantageous) market between market participants. So NRV may not equal fair value less costs to sell. Students lose marks by treating the two as the same.

The Standard also guides how NRV is estimated. Estimates use the most reliable evidence available when made, and consider price or cost fluctuations after the period end only to the extent that such events confirm conditions existing at the end of the period. The purpose for which inventory is held also matters.

Key rules to remember

Net realisable value (NRV)
NRV = Estimated selling price in the ordinary course of business − Estimated costs of completion − Estimated costs necessary to make the sale
Entity-specific. Use the ordinary-course selling price, not a forced-sale price.
Fair value vs NRV
NRV is entity-specific; fair value is not. NRV may not equal fair value less costs to sell.
Fair value is an orderly-transaction price between market participants at the measurement date (Ind AS 113).
NRV where sales contracts exist
Quantity covered by firm contracts: NRV uses the contract price. Excess quantity: NRV uses general selling prices.
Provisions from firm sales contracts exceeding inventory held, or from firm purchase contracts, are dealt with under Ind AS 37.
Scope exclusions (measurement only)
(a) Producers of agricultural and forest products, agricultural produce after harvest, minerals and mineral products, to the extent measured at NRV under well-established industry practice. (b) Commodity broker-traders measuring at fair value less costs to sell.
Changes in value are recognised in profit or loss in the period of the change.
Materials held for production
Materials are not written down below cost if the finished products are expected to sell at or above cost. If the finished products' cost exceeds NRV, write materials down to NRV.
Replacement cost of materials may be the best available measure of their NRV.

How to solve Scope and Definitions under Ind AS 2 questions

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

  1. 1Identify who holds the inventory: a manufacturer, trader, farmer, miner or commodity broker-trader.
  2. 2Check the exclusion. If it is an agricultural, forest or mineral producer, ask whether inventory is measured at NRV under well-established industry practice. If it is a broker-trader, ask whether it is measured at fair value less costs to sell.
  3. 3State the result precisely: the holder is excluded from the measurement requirements only, and only to that extent.
  4. 4If a number is needed, compute NRV: estimated selling price in the ordinary course less costs of completion less costs necessary to make the sale.
  5. 5Check the purpose of holding: use the contract price for the quantity under firm sales contracts and general selling prices for the excess.
  6. 6If asked to compare, state that NRV is entity-specific and fair value is not, and that NRV may differ from fair value less costs to sell.
  7. 7Conclude with the treatment, and mention where value changes go (profit or loss in the period of the change) if the excluded measurement basis applies.

Quickest way: Two-question scope check

When to use it: For MCQs that ask whether Ind AS 2 measurement rules apply to a given holder.

  1. Ask: is the holder a producer of agricultural, forest or mineral products, or a commodity broker-trader?
  2. If no, Ind AS 2 measurement rules apply in full.
  3. If yes, ask: is the inventory measured at NRV by industry practice (producers) or fair value less costs to sell (broker-traders)?
  4. If yes, the measurement rules do not apply. If no, they apply.
  5. For NRV numbers, write: selling price − completion cost − selling cost, and nothing else.

Common mistakes in Scope and Definitions under Ind AS 2

  • Saying all inventories of farmers, miners and brokers are outside Ind AS 2.

    Students remember the list of holders and forget the condition.

    Fix: Add the condition every time: only to the extent measured at NRV under industry practice, or at fair value less costs to sell for broker-traders.

  • Saying NRV and fair value are the same thing.

    Both look like a selling price less something.

    Fix: Remember that NRV is entity-specific, fair value is not. NRV may not equal fair value less costs to sell.

  • Leaving out estimated costs of completion when computing NRV.

    Students deduct only selling expenses.

    Fix: Deduct both costs of completion and costs necessary to make the sale.

  • Using general selling price for inventory covered by a firm sales contract.

    Students ignore the purpose for which stock is held.

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

  • Writing that excluded inventories are outside the entire Standard.

    Loose reading of the word 'scope'.

    Fix: Write that they are excluded from only the measurement requirements.

Worked examples

Example 1

Kaveri Agro Ltd holds harvested wheat. Sale is assured under a government guarantee and the wheat is measured at net realisable value under well-established industry practice. Another company, Sunrise Commodities Ltd, is a commodity broker-trader that measures its stock at fair value less costs to sell. Do the measurement requirements of Ind AS 2 apply to them? Where are changes in value recognised?

Show the solution
  1. Kaveri Agro is a producer of agricultural products and holds produce after harvest. Its inventory is measured at NRV under well-established industry practice, with sale assured by a government guarantee.
  2. So Kaveri Agro's wheat is excluded from the measurement requirements of Ind AS 2, to that extent.
  3. Sunrise Commodities is a commodity broker-trader and measures inventory at fair value less costs to sell.
  4. So its inventory is also excluded from only the measurement requirements.
  5. In both cases, changes in value (NRV or fair value less costs to sell) are recognised in profit or loss in the period of the change.

Answer: The measurement requirements of Ind AS 2 do not apply to either company's inventory, because each uses the permitted basis. Changes in value go to profit or loss in the period of the change.

Example 2

Meera Textiles Ltd holds 1,000 partly finished shirts at a cost of ₹600 each. Estimated selling price is ₹800 each in the ordinary course. Estimated cost to complete is ₹120 per shirt and estimated selling cost is ₹40 per shirt. Compute NRV per shirt and in total, and compare it with cost.

Show the solution
  1. NRV per shirt = ₹800 − ₹120 − ₹40.
  2. NRV per shirt = ₹640.
  3. Total NRV = 1,000 × ₹640 = ₹6,40,000.
  4. Total cost = 1,000 × ₹600 = ₹6,00,000.
  5. NRV is above cost, so there is no write-down below cost under the NRV test.

Answer: NRV is ₹640 per shirt, ₹6,40,000 in total. This exceeds cost of ₹6,00,000, so no write-down is required.

Exam tips

  • In theory answers, state the exclusions in two points and always add the condition on measurement basis.
  • In MCQs, watch for options that say the Standard does not apply at all. The exclusion covers only measurement requirements.
  • For NRV numbers, show the deduction of completion and selling costs as separate lines to earn step marks.
  • For a 'differentiate NRV and fair value' question, give at least three points: meaning, entity-specific or not, and that NRV may not equal fair value less costs to sell.
  • If contracts are mentioned, split the quantity into contracted and excess before computing NRV.

Practice questions from Inventories (Ind AS 2)

Scope and Definitions under Ind AS 2 in other exams

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

Scope and Definitions under Ind AS 2: frequently asked questions

What is net realisable value in Ind AS 2?

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. It is the net amount the entity expects to realise from selling the inventory.

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

NRV is entity-specific and reflects what this entity expects to realise in the ordinary course. Fair value is the price in an orderly transaction between market participants at the measurement date and is not entity-specific. NRV may not equal fair value less costs to sell.

Which inventories are excluded from the measurement rules of Ind AS 2?

Inventories of producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent measured at NRV under well-established industry practice, are excluded. So are inventories of commodity broker-traders measured at fair value less costs to sell.

Are excluded inventories outside Ind AS 2 completely?

No. They are excluded from only the measurement requirements of the Standard. Changes in their value are recognised in profit or loss in the period of the change.