Ind AS 2, “Inventories,” provides guidance on the valuation of inventory in an entity’s financial statements. Inventory, also known as stock, refers to goods held by a company for the purpose of resale, production, or supply in the normal course of business. The standard outlines how to determine the cost of inventory and the subsequent recognition of cost in the financial statements.
Inventory is valued at the lower of cost and net realizable value. Here’s how inventory is valued as per Ind AS 2:
Cost of Inventory:
The cost of inventory includes all costs that are necessary to bring the inventory to its present location and condition. This includes:
Purchase Price: The cost of acquiring the goods, including any trade discounts, rebates, or other directly attributable costs of acquisition.
Conversion Costs: Direct costs of production, such as direct labor and manufacturing overheads, that are necessary to convert raw materials into finished goods.
Other Costs: Other costs directly attributable to the acquisition or production of the inventory.
Net Realizable Value (NRV):
Net realizable value is the estimated selling price in the ordinary course of business, minus the estimated costs of completion and the estimated costs necessary to make the sale.
Lower of Cost and Net Realizable Value (LCNRV):
Inventory is valued at the lower of its cost and net realizable value. This means that if the net realizable value of inventory is lower than its cost, the inventory should be written down to its net realizable value. This recognizes any decline in the value of inventory due to factors such as obsolescence, damage, or a decline in market prices.
