The valuation of raw materials under the relevant Indian Accounting Standards (Ind AS) follows the principle of “lower of cost and net realizable value” (LCNRV). This principle is similar to the “lower of cost or market” (LCM) principle under the previous Indian Generally Accepted Accounting Principles (GAAP).
According to Ind AS 2, Inventories, raw materials should be valued at the lower of their cost or net realizable value. Cost can be determined using various methods such as the weighted average cost, FIFO (First-In, First-Out), or specific identification method. The cost includes all costs incurred to bring the raw materials to their present location and condition, such as purchase price, transportation costs, and any applicable taxes.
Net realizable value (NRV) is the estimated selling price of the finished goods that will be produced using the raw materials, less any estimated costs to complete the production and make the sale. If the NRV of the finished goods is lower than the cost of the raw materials, the raw materials should be written down to their net realizable value.
It is important to assess the net realizable value on a regular basis, considering factors such as market conditions, obsolescence, and deterioration in value. Any write-down of raw materials to their net realizable value should be recognized as an expense in the income statement.
In summary, the valuation of raw materials under relevant Ind AS is based on the principle of lower of cost and net realizable value. This ensures that the raw materials are carried at the lower of their cost or their estimated selling price, taking into account any costs required to complete production and make the sale.
