Ind AS 2 Inventories explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Ind AS 2 requires inventories to be measured at the lower of cost and net realisable value. Cost includes purchase, conversion and other costs to bring inventory to its present location and condition, assigned using FIFO or weighted average — LIFO is not permitted.
Overview
Ind AS 2, notified under the Companies (Indian Accounting Standards) Rules, 2015, prescribes the accounting for inventories — the determination of cost, its subsequent recognition as an expense (cost of goods sold), and any write-down to net realisable value (NRV). It ensures that assets are not carried at more than the amount expected to be realised from their sale or use.
Scope and Applicability
Ind AS 2 applies to all inventories except: financial instruments (Ind AS 32/109), biological assets and agricultural produce at the point of harvest (Ind AS 41), and work-in-progress arising under construction and service contracts (Ind AS 115). It also does not apply to the measurement of inventories held by commodity broker-traders who measure at fair value less costs to sell, or by producers of agricultural and mineral products measured at NRV per established industry practice.
Measurement of Cost
Cost comprises: (a) purchase cost — purchase price, import duties, non-recoverable taxes, freight and handling, less trade discounts and rebates; (b) conversion cost — direct labour and a systematic allocation of fixed and variable production overheads; and (c) other costs incurred in bringing inventories to their present location and condition. Fixed overheads are allocated on normal capacity; abnormal waste, storage of finished goods, most administrative overheads and selling costs are excluded and expensed.
Cost Formulas
Items ordinarily not interchangeable, and goods produced/segregated for specific projects, use specific identification. For all other inventory, cost is assigned using FIFO or the weighted average cost formula, applied consistently for inventories of a similar nature and use. LIFO is prohibited.
Net Realisable Value and Write-downs
Inventories are written down to NRV item by item (or by groups of similar items) when cost may not be recoverable — due to damage, obsolescence, a fall in selling price, or a rise in completion/selling costs. Materials held to produce finished goods are not written down below cost if the finished product will sell at or above cost.
Worked Example
A trader holds 1,000 units purchased at ₹500 each (cost ₹5,00,000). At year-end the market has softened: expected selling price is ₹520, but selling costs (commission, freight) are ₹40 per unit. NRV = ₹520 − ₹40 = ₹480 per unit, i.e. ₹4,80,000. Since NRV (₹4,80,000) is below cost (₹5,00,000), inventory is written down by ₹20,000, charged to the statement of profit and loss. If in the next year selling prices recover to ₹560 (NRV ₹520), the write-down is reversed up to the original ₹20,000, restoring carrying value to cost.
Disclosure
Entities disclose the accounting policy and cost formula used, the total carrying amount and classifications (raw materials, WIP, finished goods, stores and spares), the amount recognised as an expense, and the amount of any write-down and reversal, with the circumstances behind reversals.
Key Differences from AS 2
The core principle mirrors old AS 2, but Ind AS 2 clarifies the treatment of purchase on deferred settlement terms (the excess over normal price is a finance cost), and aligns NRV and disclosure requirements with IFRS. LIFO was already disallowed under AS 2 as well.