A market-price decline needs the right inventory test
Ind AS 2 requires lower of cost and net realisable value, but paragraphs 31–33 add important purpose, raw-material and reversal rules. Firm-contract quantities and excess stock can have different price evidence; a raw-material price fall does not automatically require a write-down where finished products are expected to sell at or above cost. This guide, checked on 26 October 2026, applies to ordinary inventory within the Ind AS measurement requirements. ICAI: Ind AS 2 paragraphs 9 and 28–36.
Split firm-contract quantities from excess stock
Under paragraph 31, NRV for quantities held to satisfy firm sales or service contracts uses the contract price, while quantities beyond those contracts use general selling prices. Retain the actual firm commitment, quantity allocation and completion/selling-cost estimates. A non-binding sales forecast is not automatically a firm contract. Obligations exceeding stock or arising from purchase contracts may require separate Ind AS 37 analysis.
Raw materials require a finished-product view
Paragraph 32 prevents a mechanical write-down below cost of materials/supplies held for production if the finished output is expected to sell at or above cost. Prepare a supported finished-product cost and NRV working, including remaining production and sale costs as relevant. If falling material prices indicate finished-product cost exceeds NRV, assess a material write-down; replacement cost may then be the best available NRV measure in those circumstances, not an automatic universal valuation basis.
Avoid broad netting of unrelated inventory
Paragraph 29 ordinarily uses item-wise assessment, with appropriate limited grouping of similar or related items in the stated circumstances. Do not offset an unrelated item’s recoverability shortfall against another item’s excess expected margin merely because both sit in finished goods. Document the grouping basis rather than applying one percentage write-down to the whole operating segment without analysis.
Later evidence and later new events differ
Paragraph 30 considers reliable estimates and later price/cost movements to the extent they confirm conditions existing at reporting date. A later sale can provide relevant evidence, but a wholly new later event is not automatically proof of the earlier condition. Preserve the chronology and the estimated completion/sale costs. The examples stipulate whether later evidence confirms the reporting-date facts; they do not decide every subsequent-event question.
Reassess NRV and cap a reversal
Paragraph 33 requires a new assessment in subsequent periods. A qualifying reversal is limited to the original write-down so the new carrying amount is the lower of original cost and revised NRV. Paragraph 34 addresses expense/reversal recognition and paragraph 36 the relevant disclosures. Keep original cost, prior write-down, revised NRV, quantity still held and recognised reversal linked to the same inventory; a price rebound does not create a gain above original cost under this rule.
Applicable primary references
ICAI: Ind AS 2 paragraphs 9 and 28–36
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Firm contract and excess quantities
One hundred units cost ₹100 each. Sixty satisfy a firm contract with selling price ₹130 and necessary selling cost ₹10 per unit, so NRV ₹120 exceeds cost and those units remain at ₹6,000. Forty excess units have general selling price ₹90 and selling cost ₹5, giving NRV ₹85 and carrying value ₹3,400. Total carrying value is ₹9,400 and write-down ₹600 against ₹10,000 cost.
Illustrative example 2: Material price fall without finished-product loss
One hundred material units cost ₹50 each, or ₹5,000; replacement price falls to ₹40. The related finished product is expected to cost ₹80 per unit and sell for ₹90 with ₹5 sale costs, giving NRV ₹85. As the stipulated finished product remains recoverable above ₹80 cost, paragraph 32 does not require reducing these materials to ₹4,000 solely because replacement prices fell.
Illustrative example 3: Replacement cost as supported NRV evidence
One hundred material units cost ₹50 each. On the stated evidence, falling prices indicate finished-product cost ₹80 exceeds its ₹70 NRV, and ₹38 material replacement cost is established as the best available measure of material NRV. Material carrying value is ₹3,800 and write-down ₹1,200 from ₹5,000. The ₹38 basis requires evidence; it is not presumed for every material price fall.
Illustrative example 4: Unrelated margins cannot conceal a loss
Two unrelated inventory items each cost ₹100. Item A has NRV ₹80; B has NRV ₹130. Item-wise carrying amounts are ₹80 and ₹100, totalling ₹180 with a ₹20 write-down. Netting aggregate cost ₹200 against aggregate NRV ₹210 would miss the ₹20 shortfall on A on these facts.
Illustrative example 5: Reversal remains capped at cost
The same retained item originally cost ₹100 and was written down to ₹70. Revised supported NRV becomes ₹95: reverse ₹25 and carry ₹95. In a later qualifying reassessment NRV is ₹120: only another ₹5 can be reversed, restoring cost ₹100. Total reversals are ₹30, not ₹50.
Illustrative example 6: Later evidence confirms an earlier condition
Inventory cost at 31 March 2027 is ₹80,000. A 12 April 2027 sale provides stipulated reliable evidence that reporting-date NRV, after necessary sale costs, was ₹72,000. The write-down is ₹8,000. If the price instead resulted solely from a new post-year-end event, this assumed conclusion would need different subsequent-event analysis.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm inventory and framework scope | Ordinary Ind AS measurement population. |
| 2 | Retrieve original cost and quantity | Cost formula, item identity and physical records. |
| 3 | Identify the holding purpose | Firm commitments versus excess stock. |
| 4 | Support the relevant selling price | Contract or general market evidence. |
| 5 | Estimate completion and selling costs | Reliable item-specific working. |
| 6 | Assess raw-material economics | Finished-product cost, NRV and replacement-cost relevance. |
| 7 | Review grouping and avoid unsupported netting | Similar/related item basis and separate losses. |
| 8 | Analyse later evidence chronology | Existing-condition confirmation versus new event. |
| 9 | Recalculate reversals against original cost | Prior write-down, revised NRV and retained quantity. |
| 10 | Complete recognition and disclosure | Expense/reversal amounts, causes and supporting records. |
Sixteen practitioner FAQs
1. Does every market decline require the same write-down?
No. Apply the relevant cost/NRV and inventory-purpose rules.
2. How are firm-contract quantities valued for NRV evidence?
Paragraph 31 uses the firm contract price, with the relevant NRV costs considered.
3. What price evidence applies to excess quantities?
General selling prices under that paragraph.
4. Is a sales forecast automatically a firm contract?
No. Establish the actual commitment.
5. Can contracts exceeding inventory raise another accounting issue?
Yes. The stated obligations can require separate Ind AS 37 analysis.
6. Must raw materials always fall to current replacement price?
No. Paragraph 32 requires the finished-product recoverability assessment.
7. What if finished output is expected to sell at or above cost?
Materials held for that production are not written down below cost solely under the stated material-price-fall logic.
8. When can replacement cost become useful NRV evidence?
In the paragraph 32 circumstances where the material decline indicates finished-product cost exceeds NRV.
9. Is replacement cost always legally equivalent to NRV?
No. The standard says it may be the best available measure in those circumstances.
10. Can unrelated profitable stock offset another item’s loss?
Do not use unsupported broad netting instead of the paragraph 29 assessment.
11. Are all items required to be tested in total isolation?
The standard permits appropriate grouping in its stated similar/related circumstances.
12. Can a later sale inform reporting-date NRV?
Yes, to the extent it confirms conditions existing then.
13. Does a wholly new later event automatically prove the earlier condition?
No. Analyse the chronology and applicable subsequent-event requirements.
14. Must NRV be reassessed in later periods?
Paragraph 33 requires a new assessment.
15. Can a reversal lift carrying value above original cost?
No. The stated cap and lower-of-cost/revised-NRV rule prevent that.
16. What must the reversal file preserve?
Original cost, prior write-down, retained quantity, revised NRV, evidence and recognised movement.
Conclusion
Use contract purpose and finished-product economics when testing inventory recoverability; avoid blanket raw-material write-downs and reversals above original cost.