Use the retail method to approximate cost
Ind AS 2 paragraphs 21–22 permit the retail method for convenience when it approximates cost. It is commonly useful for many rapidly changing retail items with similar margins and impracticable alternative costing. Reduce the stock’s retail sales value by an appropriate gross-margin percentage that reflects markdowns. Then apply the lower-of-cost-and-net-realisable-value requirement; a markdown-aware cost estimate is not the whole NRV test.
Read the applicable text: ICAI compendium: notified Ind AS 2, paragraphs 6, 9, 21–22 and 28–33; ICAI compendium: notified Ind AS 10, adjusting events after the reporting period.
Set a coherent retail and margin basis
Build pools by departments or subgroups with similar margins. Use comparable net sales and retail prices for the margin calculation, excluding amounts collected on behalf of tax authorities. For invoice cost, include directly attributable costs and nonrecoverable taxes and exclude recoverable taxes, discounts and rebates as required by Ind AS 2. Reconcile the stock-count quantities to the retail value of unsold items. Distinguish gross margin on sales from markup on cost; the rate cannot be transferred from one basis to the other without conversion. Preserve dated price records and separate markdown-sensitive items where a broad average would distort their estimated cost.
Calibrate markdowns against actual item evidence
A markdown may reduce retail selling value without changing purchase cost. Test the implied cost against samples with known invoice cost, freight and other properly attributable items. If the approximation fails because clearance margins, returns or product mixes differ, refine the pools or use a better cost basis for those items. The standard does not prescribe a single mechanical percentage for every markdown.
Review NRV after estimating cost
Under paragraphs 6 and 9, compare cost with estimated selling price in the ordinary course less estimated completion costs and costs necessary to make the sale. Paragraph 29 generally requires item-level comparison. Group only where warranted, for example similar or related items in the same product line, with similar purposes or end uses, produced and marketed in the same area and not practicably evaluated separately. Avoid offsetting a clearance loss with a profitable department. Use subsequent selling evidence only insofar as it confirms conditions at the reporting date. Reconcile the write-down separately; reassess NRV later and limit any reversal to the original write-down under paragraph 33.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Single supported pool
Unsold stock has retail value ₹80 lakh and an appropriate gross margin of 25% of sales. Estimated cost is ₹60 lakh; this is before a separate NRV test.
Illustrative example 2: Two departments
One pool has retail value ₹50 lakh and margin 20%; another ₹30 lakh and margin 40%. Estimated costs are ₹40 lakh and ₹18 lakh, totalling ₹58 lakh.
Illustrative example 3: Markup conversion
A 25% markup on cost gives a margin on sales of 25 ÷ 125, or 20%. For stock retailing at ₹25 lakh, estimated cost is ₹20 lakh.
Illustrative example 4: Markdown-sensitive test
A sampled lot cost ₹72,000, first retailed at ₹1 lakh and now retails at ₹80,000. Applying the old 28% margin would estimate ₹57,600. Its observed margin at the marked-down price is 10% of sales. Applying 10% to the new retail basis gives the supported cost of ₹72,000; applying the old margin would understate it by ₹14,400.
Illustrative example 5: Separate NRV
Supported estimated cost is ₹4.50 lakh. Selling price is ₹4.30 lakh, with ₹0.20 lakh necessary selling costs and no completion costs. NRV is ₹4.10 lakh and the write-down is ₹0.40 lakh.
Illustrative example 6: Margin drift review
The estimate is ₹9.50 lakh for a sample with independently supported cost of ₹10 lakh. The difference is ₹0.50 lakh, or 5% of supported cost. Assess whether the pool needs refinement before using it at close.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm eligible population | Retail volumes, similar margins and feasibility of alternatives. |
| 2 | Freeze counted quantities | Approved counts, returns and cut-off reconciliation. |
| 3 | Verify retail prices | Dated price and markdown master for remaining units. |
| 4 | Define homogeneous pools | Department and subclass mapping with margin evidence. |
| 5 | Convert rate basis | Markup-to-margin working, consistently measured sales values. |
| 6 | Reconcile the markdown impact | Original price, marked-down price and margin support. |
| 7 | Back-test costs | Sample invoice costs and attributable amounts. |
| 8 | Estimate NRV separately | Expected proceeds, completion and necessary selling costs. |
| 9 | Review exceptions | Loss-making items, incompatible margins and estimation errors. |
| 10 | Reconcile to accounts | Approved cost, write-down and closing inventory bridge. |
Sixteen practitioner FAQs
1. Can a retailer use the method for every product?
Only where results approximate cost; test distinct or atypical products separately.
2. Is this an alternative to lower of cost and NRV?
No. It estimates cost; NRV remains a separate measurement check.
3. Does gross margin mean markup on purchase cost?
No. Convert the rate if it is stated as a markup on cost.
4. Can one margin cover unrelated departments?
Only where the approximation is supported; unlike margins can materially distort the total.
5. Do markdowns automatically change historical cost?
No. Reflect markdowns in the estimation basis and assess NRV separately.
6. Why use current rather than original shelf prices in a markdown review?
They reveal the changed relationship between selling value and cost.
7. Can a clearance category have a negative margin?
It can on the facts; support the estimated cost and assess any resulting NRV shortfall.
8. Can selling costs be omitted from NRV?
Include estimated costs necessary to make the sale, as required by the standard.
9. Do count errors disappear when margins are averaged?
No. Correct quantities and ownership before applying the method.
10. What if invoices are available for unusual high-value items?
Use reliable item evidence rather than forcing unlike items into a pool.
11. Does paragraph 29 always require pooling by department?
No. It generally starts at item level, with limited grouping when justified.
12. How can later sales help?
Use them where they corroborate conditions at reporting date.
13. Should outdated margins be carried into the next close?
Revalidate them for current mix, markdowns and costs.
14. Can profit on one product offset another product’s write-down?
Do not offset unrelated items merely because they are in the same department.
15. What if the back-test is materially wrong?
Refine the margin or use a costing approach that better approximates actual cost.
16. What should the controller sign off?
Population, quantities, price basis, margins, sample validation and separate NRV.