Net realisable value and inventory write-downs

Inventory write-downs hit gross margin directly, and auditors test them closely, especially for slow-moving and obsolete inventory. This guide explains how to calculate net realisable value, which costs to deduct, how granular the test should be, and when a write-down is reversed.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

Net realisable value (NRV) is the estimated selling price of inventory in the ordinary course of business less the estimated costs of completion and the costs needed to make the sale. IAS 2 measures inventory at the lower of cost and net realisable value, so when NRV falls below cost, the inventory is written down and the loss expensed. Write-downs are made item by item or for groups of similar items, and reversed if NRV recovers. In this guide's example, three product lines need a write-down of CU 3,400.

At a glance

NRV
Selling price less completion and selling costs
Measure at
Lower of cost and NRV
Test
Item by item or similar groups
Write-down
Expensed in the period
Recovery
Reversed, up to cost
Excel
Inventory costing comparison
Net realisable value and inventory write-downsNRV: Selling price less completion and selling costs; Measure at: Lower of cost and NRV; Test: Item by item or similar groups; Write-down: Expensed in the period; Recovery: Reversed, up to cost; Excel: Inventory costing comparison.KEY FACTS AT A GLANCENet realisable value and inventory write-downsNRVSelling price lesscompletion and sellingcostsMeasure atLower of cost and NRVTestItem by item or similargroupsWrite-downExpensed in the periodRecoveryReversed, up to costExcelInventory costingcomparisonChecked against official sourcesTax BakersNet realisable value and inventory write-downsNRV: Selling price less completion and selling costs; Measure at: Lower of cost and NRV; Test: Item by item or similar groups; Write-down: Expensed in the period; Recovery: Reversed, up to cost; Excel: Inventory costing comparison.KEY FACTS AT A GLANCENet realisable value and inventorywrite-downsNRVSelling price less completion and sellingcostsMeasure atLower of cost and NRVTestItem by item or similar groupsWrite-downExpensed in the periodRecoveryReversed, up to costExcelInventory costing comparisonChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

How do you calculate net realisable value?

NRV = estimated selling price - estimated costs to complete - estimated costs to sell. Selling prices are those expected in the ordinary course of business, using the most reliable evidence available at the reporting date, including price changes after the year end that confirm conditions at the year end. Costs to sell include commissions, distribution and marketing costs directly attributable to the sale.

An inventory write-down example

Product lineCostSelling priceCosts to sellNRVCarrying amountWrite-down
Line A10,00014,0001,00013,00010,0000
Line B8,0007,5005007,0007,0001,000
Line C3,0008002006006002,400
Total21,00017,6003,400
Cost and net realisable value by product line (CU)Cost and net realisable value by product line (CU)10,00013,000Line A8,0007,000Line B3,000600Line CCostNet realisable value
Where NRV is below cost, the inventory is written down to NRV.

Line A stays at cost: its NRV of 13,000 is higher, and the expected profit is not recognised early. Line B is written down by 1,000 because it is being sold at a discount. Line C, obsolete models, is written down by 2,400 to what it can still fetch. The write-down is recognised in profit or loss, usually within cost of sales.

Item by item or in groups?

Usually item by item. Similar items relating to the same product line, with similar purposes, produced and marketed in the same area, may be grouped. Writing down by broad class, such as all finished goods or all inventory in one segment, is not appropriate, because profits on some items would hide losses on others.

What about raw materials?

Materials held for use in production are not written down below cost if the finished products they will go into are expected to sell at or above cost. If a fall in material prices shows the finished goods will sell below cost, the materials are written down, and replacement cost may be the best available measure of their NRV.

Do events after the year end matter?

Yes, if they confirm conditions that existed at the reporting date. Selling a product line below cost shortly after the year end is evidence that its NRV was already below cost. A price fall caused by a new event after the year end, such as a competitor's launch, does not adjust the year-end figure but may need disclosure.

What about inventory held for firm sales contracts?

NRV of inventory held to satisfy firm sales contracts is based on the contract price. If the contracts are for less than the inventory held, NRV of the excess is based on general selling prices. Losses on firm sales contracts beyond the inventory held are onerous contracts under IAS 37.

When is a write-down reversed?

When the circumstances that caused it no longer exist, or there is clear evidence of an increase in NRV, the write-down is reversed so the carrying amount is the lower of cost and the revised NRV. The reversal is recognised as a reduction of the inventory expense in that period. US GAAP does not allow this for annual write-downs; see IAS 2 vs ASC 330.

How do companies estimate obsolete inventory?

  • Ageing reports showing items not sold for 6, 12 or 24 months.
  • Sales after the year end and current price lists.
  • Product discontinuation decisions and new model launches.
  • Physical counts identifying damaged goods.

A policy of fixed provision percentages by age is a useful starting point, but must be checked against actual selling prices. The NRV sheet of the Inventory costing comparison (Excel) runs the test by product line. See also IAS 2 explained.

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Questions people ask

What is net realisable value?

The estimated selling price in the ordinary course of business, less the estimated costs of completion and the costs necessary to make the sale.

How is an inventory write-down calculated?

As the excess of cost over net realisable value, normally item by item or for groups of similar items.

Can inventory write-downs be reversed under IFRS?

Yes. IAS 2 requires reversal when NRV recovers, up to the original cost.

Is net realisable value the same as fair value?

No. NRV is entity-specific and deducts selling costs; fair value less costs to sell is a market-based measure.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 2 Inventories

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IAS 2IAS 2 inventories explainedIAS 2Cost formulas: FIFO and weighted averageIFRS vs US GAAPIAS 2 vs ASC 330: inventory, LIFO and write-downs

More in IAS 2

TopicAll 3 guides in IAS 2

This guide is general information. It is not tax or legal advice for your situation.