Ind AS 2 — Inventories

Ind AS 2 prescribes the accounting treatment for inventories. Like its AS counterpart, its central rule is that inventories are measured at the lower of cost and net realisable value (NRV). The standard is closely converged with IAS 2, and for most ordinary inventory situations it produces the same result as AS 2 — but there are some refinements worth understanding.

Objective and scope

The objective is to prescribe the accounting treatment for inventories, including the determination of cost and its subsequent recognition as an expense, and any write-down to net realisable value. Inventories are assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services. The standard excludes certain inventories, including work in progress under construction contracts and financial instruments, and does not apply to inventories held by commodity broker-traders measured at fair value less costs to sell, or to producers of agricultural and forest products and minerals measured at NRV under established practice.

Measurement — lower of cost and NRV

Inventories are measured at the lower of cost and net realisable value. 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. NRV is an entity-specific value (what the entity expects to realise), which is assessed item by item or by groups of similar items. The lower-of-cost-and-NRV rule is an application of prudence: inventory is not carried at more than the amount expected to be recovered from its sale or use.

Cost of inventories

The cost of inventories comprises all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.

Costs of purchase include the purchase price, import duties and other non-recoverable taxes, and transport, handling, and other costs directly attributable to acquisition, less trade discounts, rebates, and similar items.

Costs of conversion include costs directly related to units of production (such as direct labour) and a systematic allocation of fixed and variable production overheads. Fixed production overheads are allocated based on normal capacity, and unallocated overheads from low production are expensed in the period, not capitalised.

Other costs are included only to the extent incurred in bringing inventories to their present location and condition. Excluded costs (charged as expenses) include abnormal wastage, storage costs not necessary in the production process, administrative overheads not contributing to present location and condition, and selling costs.

A specific Ind AS refinement: where an entity purchases inventories on deferred settlement terms that effectively contain a financing element, that element (the difference between the price for normal credit terms and the amount paid) is recognised as interest expense over the period of financing, rather than as part of the cost of inventory.

Cost formulas

The cost of inventories that are not ordinarily interchangeable, and goods produced and segregated for specific projects, is assigned using specific identification. For other inventories, cost is assigned using FIFO or the weighted average cost formula. The same cost formula is used for all inventories of a similar nature and use. As with AS 2, LIFO is not permitted. Techniques such as standard cost or the retail method may be used if the results approximate cost.

Recognition as an expense and write-downs

When inventories are sold, their carrying amount is recognised as an expense in the period in which the related revenue is recognised (the matching of cost of goods sold with revenue). The amount of any write-down of inventories to NRV, and all losses of inventories, are recognised as an expense in the period the write-down or loss occurs. A reversal of a previous write-down (because the circumstances that caused it no longer exist, and NRV has recovered) is recognised as a reduction in the inventory expense in the period of reversal — Ind AS 2 expressly permits reversal of a prior write-down up to the amount of the original write-down.

Disclosure

Disclosures include the accounting policies adopted in measuring inventories (including the cost formula used); the total carrying amount of inventories and the carrying amount in classifications appropriate to the entity; the amount of inventories recognised as an expense during the period; the amount of any write-down recognised as an expense; and the amount of any reversal of a write-down, with the circumstances that led to it.

A full worked example

Let's put real numbers to it. A trading company deals in one product. It has no opening stock, and during the year it makes three purchases and one sale, as follows.

Date	Transaction	Units	Rate (₹)	Value (₹)
1 Apr	Purchase	1,000	500	5,00,000
1 Jul	Purchase	1,000	520	5,20,000
1 Oct	Purchase	1,000	560	5,60,000
1 Jan	Sale	(2,000)	—	—
31 Mar	Closing stock	1,000	?	?

Two thousand units were sold, so 1,000 remain. The question Ind AS 2 answers is: at what value does that closing stock sit on the balance sheet? The answer depends first on the cost formula, and then on the NRV test.

Step 1 — Cost under FIFO. Under First-In-First-Out, the units sold are assumed to be the earliest purchased, so the 1,000 units left are the most recent — the 1 October batch.

Cost formula	Which units remain	Closing stock cost (₹)
FIFO	The 1,000 units from 1 Oct @ ₹560	5,60,000

Step 2 — Cost under weighted average. Under the weighted-average method, every unit carries the average cost of all units available.

Item	Working	Amount
Total cost of purchases	5,00,000 + 5,20,000 + 5,60,000	₹15,80,000
Total units	1,000 + 1,000 + 1,000	3,000
Weighted-average cost per unit	15,80,000 ÷ 3,000	₹526.67
Closing stock cost	1,000 × 526.67	₹5,26,667

Notice the cost formula alone moves the closing-stock figure from ₹5,26,667 to ₹5,60,000 — a ₹33,333 difference, and therefore a ₹33,333 difference in reported profit, on identical transactions. Ind AS 2 requires the same formula to be applied consistently to all inventories of a similar nature. LIFO, which would assume the newest units are sold first and leave the oldest ₹500 units in stock, is not permitted.

Step 3 — Apply the NRV test. Cost is only half the rule — inventory is carried at the lower of cost and net realisable value. Suppose that at year-end the selling price has fallen: each unit can be sold for ₹540, but only after ₹25 per unit of finishing and selling costs. We take the FIFO cost of ₹560 for this comparison.

Measure	Per unit (₹)	1,000 units (₹)
Cost (FIFO)	560	5,60,000
Estimated selling price	540	5,40,000
Less: costs to complete and sell	(25)	(25,000)
Net realisable value	515	5,15,000
Lower of cost and NRV	515	5,15,000
Write-down required	45	45,000

Because NRV (₹515) is below cost (₹560), the stock is written down by ₹45 per unit — a ₹45,000 charge to the profit and loss account — and the closing inventory is carried at its NRV of ₹5,15,000, not its cost.

Step 4 — The journal entries. First, the purchases are recorded into inventory as they occur (shown here in total), and then the year-end write-down is booked.

Entry	Account	Debit (₹)	Credit (₹)
Purchases into stock	Inventory	15,80,000
	Bank / Payables		15,80,000
Year-end NRV write-down	Inventory write-down (P&L)	45,000
	Inventory (provision)		45,000

Three things are worth drawing out of this example. First, the cost formula is a genuine accounting-policy choice with a real profit impact — ₹33,333 here — which is why it must be disclosed and applied consistently. Second, the NRV test can override cost entirely: however carefully cost is computed, if the goods are worth less, the lower figure wins. Third, if NRV later recovers — say the selling price rebounds next year — Ind AS 2 requires the write-down to be reversed, capped at the original cost, so inventory is never carried above what was originally paid. That reversal feature is a key difference from the impairment of a fixed asset, which is far harder to reverse.

How Ind AS 2 compares with AS 2

The core principle — lower of cost and NRV, FIFO and weighted average permitted, LIFO prohibited — is identical to AS 2. The differences are in detail: Ind AS 2 explicitly addresses the financing element in deferred-settlement purchases (treating it as interest), has somewhat more developed guidance and disclosure (including the disclosure of inventories carried at fair value less costs to sell for broker-traders), and is part of a framework that handles reversals of write-downs clearly. For most routine inventory, the two standards give the same carrying amount.

Common pitfalls

Recurring issues include not testing cost against NRV (so obsolete stock sits overstated); including selling, administrative, or abnormal-wastage costs in inventory cost; capitalising fixed overheads on actual low production rather than normal capacity; and overlooking the financing component in extended-credit purchases.

Why this is cleaner on a unified system

Inventory valuation is more reliable when inventory records, purchase and production costs, and the ledger sit in one connected system, so the lower-of-cost-and-NRV assessment and the recognition of cost of goods sold draw on a single consistent set of figures. A perpetual, costed inventory approach — where cost flows directly into valuation and into the accounts — is exactly what a unified platform makes possible, as our accounting guides describe.

This article is a detailed educational summary of Ind AS 2 in plain language. It is not a substitute for the full text of the standard. Accounting standards are amended from time to time; always verify the current, authoritative text of Ind AS 2 as notified under the Companies Act before relying on it, and consult a qualified chartered accountant for application to your specific circumstances.