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Home » Blog » Inventory Write-Down and Reversal Under Ind AS 2 | NRV Fluctuation

Inventory Write-Down and Reversal Under Ind AS 2 | NRV Fluctuation

  • Blog|News|Account & Audit|
  • 4 Min Read
  • By Taxmann
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  • Last Updated on 30 June, 2025

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inventory write-down reversal Ind AS 2

1. Question

Green Valley Organics Limited (hereinafter referred to as “the Company”) is engaged in the business of organic fruits and vegetables. As on 31st March 2024, the Company held 15,000 units of organic mango pulp in inventory. The cost per unit was Rs. 8, amounting to a total inventory cost of Rs. 1,20,000.

Due to an unexpected glut in the market and export restrictions, the net realisable value (NRV) of mango pulp declined to Rs. 6 per unit, bringing the NRV down to Rs. 90,000. Accordingly, the Company wrote down the inventory in its books as at 31st March 2024. However, by 31st March 2025, the export demand rebounded, and NRV increased to Rs. 9 per unit, totalling Rs. 1,35,000, which exceeded the original cost.

The Company reversed the write-down in FY 2024–25 and increased the value of inventory to Rs. 1,35,000 in its books. State whether the accounting treatment followed by the Company aligns with the requirements of the relevant Indian Accounting Standards.

2. Relevant Provisions

Ind AS 2, Inventories

Para 9 – Inventories shall be measured at the lower of cost and net realisable value.

Para 6 – 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.

Para 28 – The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. The cost of inventories may also not be recoverable if the estimated costs of completion or the estimated costs to be incurred to make the sale have increased. The practice of writing inventories down below cost to net realisable value is consistent with the view that assets should not be carried in excess of amounts expected to be realised from their sale or use.

Para 34 – When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories shall be recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

Para 33 – A new assessment is made of net realisable value in each subsequent period. When the circumstances that previously caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase in net realisable value because of changed economic circumstances, the amount of the write-down is reversed (i.e. the reversal is limited to the amount of the original write-down) so that the new carrying amount is the lower of the cost and the revised net realisable value. This occurs, for example, when an item of inventory that is carried at net realisable value, because its selling price has declined, is still on hand in a subsequent period and its selling price has increased.

Extract of Para 36 – The financial statements shall disclose:

……….

(e) the amount of any write-down of inventories recognised as an expense in the period in accordance with paragraph 34;

(f) the amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognized as expense in the period in accordance with paragraph 34;

(g) the circumstances or events that led to the reversal of a write-down of inventories in accordance with paragraph 34; and

……….

3. Analysis

In accordance with Ind AS 2, inventories are required to be valued at the lower of cost and net realisable value (NRV). On 31st March 2024, the cost of inventory was Rs. 8 per unit, whereas the NRV had declined to Rs. 6 per unit due to market oversupply and export restrictions. Since the NRV was lower than the cost at the reporting date, the inventory was required to be written down to Rs. 90,000. This reduction in value should be recognised as an expense in the statement of profit and loss for the year ended 31st March 2024.

As per the requirements of the standard, NRV should be reassessed at every reporting date. On 31st March 2025, market conditions had improved, leading to an increase in the NRV to Rs. 9 per unit, i.e., Rs. 1,35,000 in total. Since the conditions that originally led to the write-down no longer existed and there was a clear increase in NRV due to economic recovery, a reversal of the earlier write-down was appropriate.

However, even though the NRV exceeded the original cost, the reversal of the write-down must not exceed the amount of the original reduction in inventory value. The reversal should be made only up to the original cost of Rs. 1,20,000. Therefore, the correct treatment would be to reinstate the inventory to its original cost and recognise a gain of Rs. 30,000 in the profit and loss account for the year ended 31st March 2025.

In addition to the recognition and reversal requirements, the standard also mandates specific disclosures in the financial statements. The company must disclose the amount of the write-down recognised as an expense during the year the NRV declined, and the amount of the reversal recognised in the subsequent period. Moreover, it is also required to disclose the circumstances or events that led to the reversal, in this case, improved export demand and a recovery in market prices.

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Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied
View all posts by Taxmann

Author TaxmannPosted on June 30, 2025Categories Blog, News, Account & Audit

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