Ind AS 2 Inventories: Valuation, NRV Testing & Compliance
Inventory sits at the heart of most manufacturing and trading balance sheets and it draws the sharpest scrutiny during audit. Ind AS 2 governs how inventory is valued, when write-downs become mandatory, and what auditors are required to test.
For finance teams, a misapplied cost formula or an underprovided NRV position has direct P&L consequences-ones that typically surface at the worst possible moment in the reporting cycle.
How Ind AS 2 Shapes Inventory Measurement and Where Audit Risk Begins?
Ind AS 2 inventories standard is, at its core, a measurement standard. It tells finance teams not just what to include in inventory cost, but how to compare that cost against market realities. Getting this framework right early in the reporting cycle is the difference between a clean audit and a prolonged discussion with your auditors over provisions.
The Lower of Cost and NRV Rule
Ind AS 2 requires that inventory be carried at the lower of cost and net realisable value. Not historical cost alone but whichever is lower. The moment NRV falls below cost because of falling selling prices, rising completion costs, physical damage, or slow movement, a write-down is mandatory. There is no discretion here.
The standard permits two cost formulas: FIFO (first-in, first-out) and the weighted average method. Importantly, LIFO is explicitly prohibited under Ind AS 2. This catches companies transitioning from old IGAAP, where LIFO was a permitted option. That gap, left unaddressed, becomes an audit finding. For those familiar with IFRS, Ind AS 2 aligns closely with IAS 2 both share the lower-of-cost-and-NRV principle and the same prohibition on LIFO making it the globally recognised benchmark for inventory measurement.
What Belongs in Inventory Cost and What Ind AS 2 Rules Out
Finance teams frequently over- or under-state inventory cost because Ind AS 2 is specific about what belongs in cost and what must be excluded. Getting this wrong affects the NRV comparison directly.
| Include in Cost | Exclude from Cost |
| Purchase price less trade discounts | Abnormal wastage |
| Import duties and non-refundable taxes | Storage costs (unless production-related) |
| Direct labour and production overheads | Administrative overheads unrelated to production |
| Costs to bring inventory to current location | Selling and distribution costs |
Beyond the inclusions and exclusions, overhead absorption must be based on normal capacity not actual output under Ind AS 2. This is a frequently misapplied rule.
NRV Testing-What the Audit Procedure Actually Involves and Why It Creates Exposure
Under Ind AS 2, NRV testing becomes a direct focus during audits. The procedure ensures that no inventory item is carried above its recoverable value. In practice, auditors compare recorded costs against post-period selling prices, current market data, and management’s provisioning assessments.
Two recurring failure points often trigger audit challenges. First, reliance on outdated selling price data—auditors expect current information, not prior-quarter figures. Second, provisions based on judgment without documented assumptions—unsupported estimates are immediately questioned.
Finance teams that prepare NRV schedules in advance, using up-to-date data, transparent assumptions, and documented approvals, minimize audit friction. Those that arrive at year-end without a proper NRV schedule face a difficult process. NRV testing is not a box-ticking exercise; it is a substantive audit procedure with real profit-and-loss consequences if positions fail to hold.
How MBG Can Help You Get This Right?
Finance teams at growing manufacturing, trading, and retail businesses consistently face the same gaps: cost formulas applied inconsistently across SKUs, NRV assessments prepared too late in the reporting cycle, and overhead absorption rates not reviewed against actual capacity.
At MBG, we work with CFOs and finance controllers to build inventory valuation frameworks that are audit-ready from day one. MBG’s advisory covers cost build-up methodology, NRV testing schedules, write-down provisioning, and full disclosure compliance under Ind AS 2. Rather than reacting to audit queries, MBG helps finance teams get ahead of them.