Ind AS 2 Inventories: A Practitioner Guide for FY 2026-27
Ind AS 2 (Inventories) is the Indian Accounting Standard that prescribes how entities must account for inventories. It requires inventories to be measured at the lower of cost and net realisable value and provides guidance on cost determination and expense recognition.
The Ministry of Corporate Affairs notified Ind AS 2 through the Companies (Indian Accounting Standards) Rules, 2015. Its voluntary adoption began on 1 April 2015 and became mandatory from 1 April 2016 for Phase I companies. It replaces AS 2 (Valuation of Inventories) for companies required to comply with Ind AS.
For FY 2026-27, manufacturers face significant operational impact under Ind AS 2. ERP-based costing systems must align with the standard’s requirements, including fixed overhead allocation based on normal capacity and SKU-level NRV testing.
Ind AS 2 at a Glance
Ind AS 2 establishes that inventories must be measured at the lower of cost and net realisable value. The standard is essential for all entities holding inventory as part of their business operations, especially manufacturers and retailers.
| Field | Value |
|---|---|
| Standard Number | Ind AS 2 |
| Full Name | Inventories |
| Issuing Body | ICAI (Accounting Standards Board) |
| Notified By | MCA, Companies (Indian Accounting Standards) Rules, 2015, dated 16 February 2015 |
| Effective Date | 1 April 2015 (voluntary), 1 April 2016 (mandatory Phase I) |
| Supersedes | AS 2 (Valuation of Inventories) for Ind AS-applicable entities |
| Equivalent Standard | AS 2 ↔ Ind AS 2 ↔ IAS 2 |
| Applies To | All companies required to follow Indian Accounting Standards. Ind AS 2 prescribes the accounting treatment for inventories, providing guidance on cost determination, subsequent recognition as expense, and write-down to net realisable value. |
What is Ind AS 2: Inventories?
Ind AS 2 defines the principles for recognising and measuring inventories in financial statements. The standard requires entities to carry inventories at the lower of cost or net realisable value. Cost includes purchase price, conversion costs, and other costs necessary to bring inventories to their present location and condition.
ICAI introduced Ind AS 2 as part of India’s convergence with International Financial Reporting Standards. It aligns closely with IAS 2 issued by the International Accounting Standards Board but adapts certain requirements for Indian business realities. The predecessor standard was AS 2 under Indian GAAP.
CFOs, finance teams in manufacturing or trading companies, statutory auditors, and CA students regularly apply this standard when preparing or auditing financial statements.
Objective of Ind AS 2
The objectives of Ind AS 2 are:
- Prescribe the accounting treatment for inventories including determination of cost and its subsequent recognition as an expense.
- Provide guidance on the cost formulas used to assign costs to inventories.
- Specify when inventories should be written down to net realisable value and when previous write-downs may be reversed.
By enforcing these objectives, Ind AS 2 ensures that inventory values reflect economic reality in financial statements. This supports a true and fair view in accordance with Section 129 of the Companies Act, 2013.
Who Must Apply Ind AS 2?
Entities covered
All companies required to comply with Indian Accounting Standards must apply Ind AS 2. The roadmap notified by MCA covers:
| Phase | Applicability Criteria | Effective From |
|---|---|---|
| Phase I | Listed companies with net worth ≥ Rs 500 crore; unlisted companies with net worth ≥ Rs 500 crore; holding/subsidiary/joint venture/associate companies thereof | FY 2016-17 onwards |
| Phase II | Listed companies not covered in Phase I; unlisted companies with net worth ≥ Rs 250 crore but < Rs 500 crore; holding/subsidiary/joint venture/associate companies thereof | FY 2017-18 onwards |
Companies voluntarily adopting Ind AS before these dates also apply this standard from their date of transition.
Scope exclusions
Ind AS 2 does not apply to:
- Financial instruments (covered by Ind AS 32 and Ind AS 109).
- Biological assets related to agricultural activity at point of harvest (covered by Ind AS 41).
- Inventories of producers of agricultural/forest products or minerals measured at NRV per established industry practice (excluded from measurement requirements only).
When the standard does not apply
If an item falls within these exclusions:
Financial instruments are governed by Ind AS 32 or Ind AS 109. Biological assets at harvest are covered under Ind AS 41. Agricultural producers valuing inventory at NRV under industry norms follow those practices instead.
Key Definitions under Ind AS 2
| Term | Definition |
|---|---|
| Inventories | Assets held for sale in ordinary course of business or in production or as materials/supplies for production/services. |
| Net realisable value (NRV) | Estimated selling price less costs needed to complete sale. |
| Fair value | Price received in orderly transaction between market participants at measurement date (see also Ind AS 113). |
| Cost of inventories | All purchase costs plus conversion costs plus other costs bringing inventory to present state/location. |
| Costs of conversion | Direct production costs plus systematic allocation of fixed/variable overheads incurred converting materials into finished goods. |
| Cost formula | Method used to assign costs, specific identification, FIFO or weighted average cost method. |
Recognition and Measurement under Ind AS 2
When to recognise
An entity recognises inventory as an asset when it obtains control over goods or materials intended for sale or use in production. Recognition occurs once all costs necessary to bring inventory into its present location and condition have been incurred.
Inventories remain on the balance sheet until sold or otherwise disposed; on sale they are recognised as an expense through cost of sales. If net realisable value falls below cost before sale occurs, a write-down is recognised immediately in profit or loss.
Initial measurement
At acquisition or production completion date, inventory must be measured at the lower of its actual cost or net realisable value (Para 9).
Cost comprises:
- Purchase price including import duties/non-recoverable taxes
- Transport/handling directly attributable
- Other acquisition-related costs
- Conversion costs including direct labour
- Systematic allocation of fixed/variable overheads based on normal capacity
**Inventory Value = Lower of Cost OR Net Realisable Value**
Borrowing costs are included only if inventory qualifies as a “qualifying asset” per Ind AS 23.
Selling expenses and general administrative expenses unrelated to bringing inventory into present condition/location are excluded from inventory cost.
Subsequent measurement
At each reporting date:
- Inventory is re-assessed.
- If NRV < cost due to obsolescence/damage/market decline: entity writes down inventory to NRV.
- Write-down is recognised immediately in P&L.
- If circumstances causing write-down reverse later, e.g., demand recovers, the reversal up to original write-down amount is recognised in P&L (Paras 33-34).
Inventory can never be written up above original historical cost after reversal.
Cost Formulas Permitted Under Ind AS 2
Entities must use consistent cost formulas across similar types/nature/use inventories:
Permitted methods:
- Specific identification, required where items are not interchangeable or segregated for specific projects
- FIFO, first-in first-out
- Weighted average cost
LIFO is prohibited under Indian GAAP and IFRS convergence.
Standard costing systems may be used if they approximate actual cost reliably, commonly seen in manufacturing ERP environments if variances are monitored properly.
In periods where actual production volume differs significantly from normal capacity:
- Fixed overhead allocation per unit decreases if production exceeds normal capacity
- Unallocated overheads due to abnormally low production are expensed immediately rather than capitalised into inventory
Retail method may be used as approximation if it yields results close to actual cost, especially common among FMCG retailers managing thousands of SKUs.
Worked Examples on Ind AS 2
Example 1: Inventory write-down to NRV
Krishna Steel Industries holds finished steel stock,10,000 tonnes purchased at Rs 65,000 per tonne. On March 31st, market price drops sharply due to global glut; estimated selling price falls below original purchase rate. Estimated selling expenses per tonne are Rs 1,500.
Computation Table
| Particulars | Amount per tonne (Rs) | Total Amount (Rs crores) |
|---|---|---|
| Cost | Rs 65,000 | Rs 65 |
| Estimated Selling Price | Rs 60,000 | Rs 60 |
| Less: Estimated Selling Expenses | Rs 1,500 | Rs 1.50 |
| Net Realisable Value (NRV) | Rs 58,500 | Rs 58.50 |
Since total NRV is less than total cost:
Write-down required = Rs 65 crore, Rs 58.50 crore = Rs 6.50 crore
Journal Entry
Dr Cost of Sales (Inventory Write-down) Rs 6.50 crore
Cr Inventory Rs 6.50 crore
This write-down appears in P&L; closing balance sheet shows steel inventory valued at NRV with disclosure note explaining basis.
Example 2: Reversal of prior write-down
In FY 2024‑25 Sundaram Engineering Pvt Ltd wrote down obsolete components inventory by Rs 1.20 crore due to lacklustre demand (cost was Rs 3 crore; NRV then was only Rs 1.80 crore). In FY 2025‑26 demand revives, NRV rises again.
Computation Table
| Particulars | Amount (Rs crores) | Remarks |
|---|---|---|
| Original Inventory Cost | Rs 3 | |
| Previous Year’s Carrying Value after Write-down | Rs 1.80 | After write-down |
| Current Recoverable Amount | Rs 2.50 | New NRV |
| Maximum Reversal Allowed | Rs 0.70 | Min(Rs 0.70, Rs 1.20 original write-down) |
Inventory can now be revalued up only by reversal amount, not above original historical cost ceiling:
Inventory after reversal = Previous carrying amount + Reversal = Rs 1.80 + Rs 0.70 = Rs 2.50 crore
Journal Entry
Dr Inventory Rs 0.70 crore
Cr Cost of Sales (Reversal of Inventory Write-down) Rs 0.70 crore
This reversal appears separately in P&L; closing balance sheet shows components valued at recoverable amount but never above original acquisition cost ceiling.
Disclosure Requirements under Ind AS 2
Disclosures under Ind AS 2 are critical for transparency and comparability, as required by Schedule III to the Companies Act, 2013. The standard mandates detailed notes on inventory accounting policies, measurement bases, and key judgments. These disclosures support users in understanding inventory valuation and its impact on financial results.
| Item | Requirement | Para Reference |
|---|---|---|
| Accounting policies for inventories | Including cost formula used (FIFO, weighted average, specific identification) | Para 36(a) |
| Total carrying amount of inventories and classifications | By classification appropriate to the entity (raw materials, work-in-progress, finished goods, stores, spares) | Para 36(b) |
| Carrying amount of inventories at fair value less costs to sell | If applicable | Para 36(c) |
| Amount of inventories recognised as expense during period | Cost of sales | Para 36(d) |
| Amount of any write-down recognised in P&L | And amount of any reversal | Para 36(e), (f) |
| Circumstances or events leading to reversal of write-down | Description | Para 36(g) |
| Carrying amount of inventories pledged as security | If applicable | Para 36(h) |
Auditors must ensure these disclosures are complete and accurate to support a true and fair view under SA 700.
Common Mistakes & Industry-Specific Considerations
Common errors auditors flag
- Using LIFO cost formula (prohibited under Ind AS 2)
- Allocating fixed production overhead based on actual production rather than normal capacity
- Failing to write down inventory to NRV when net realisable value has fallen below cost
- Including borrowing costs in inventory cost where the inventory is not a qualifying asset under Ind AS 23
- Including selling and administrative costs (other than allocable overheads) in inventory cost
- Failing to reverse prior write-down when circumstances have changed and recovery has occurred
Industry application notes
In manufacturing, ERP-based standard costing systems must align with Ind AS 2 requirements. Regular analysis of variances is essential. The normal capacity assumption for fixed overhead allocation requires periodic review to prevent overstatement or understatement of inventory values.
Retailers and FMCG companies commonly apply the retail method or FIFO. SKU-level NRV testing is necessary for slow-moving or seasonal goods. Frequent markdowns and obsolescence reserves are typical due to rapid product turnover.
Real estate developers must include land cost, construction cost, allocable borrowing costs (if qualifying under Ind AS 23), and approval costs in project inventories. NRV testing is critical for unsold units, especially during market downturns that may trigger significant write-downs.
Ind AS vs Ind AS vs IFRS: Key Differences
The table below summarises key differences between Ind AS 2, AS 2 (Indian GAAP), and IAS 2 (IFRS). All three standards share core principles but differ in certain requirements and terminology.
| Aspect | AS | Ind AS | IFRS |
|---|---|---|---|
| Cost formulas permitted | FIFO, weighted average, specific identification (LIFO prohibited) | Same as AS 2 | Same |
| NRV measurement | Lower of cost and NRV | Lower of cost and NRV | Same |
| Reversal of write-down | Permitted | Required when circumstances change (Para 33) | Same as Ind AS |
| Fixed overhead allocation | Normal capacity basis | Normal capacity basis (Para 13) | Same |
| Borrowing costs in cost | Per AS 16 (qualifying asset) | Per Ind AS 23 (qualifying asset) | Same |
India’s version aligns closely with IFRS on most points. However, terminology references Indian statutes such as the Companies Act, 2013. The reversal of inventory write-downs is an explicit requirement under both Ind AS 2 and IAS 2 but was only permitted under legacy Indian GAAP.
Latest Amendments to Ind AS 2 (FY 2026-27)
No amendments have been notified to Ind AS 2 for FY 2026-27 as of 2026-05-02. The standard continues to apply in its existing form.
Related Standards You Should Know
- [Ind AS 23](/ind-as-23-borrowing-costs/), Borrowing costs included in inventory cost where inventory is a qualifying asset.
- [Ind AS 36](/ind-as-36-impairment-of-assets/), Impairment of items of inventory follows NRV approach in Ind AS 2; broader asset impairment under Ind AS 36.
- [Ind AS 41](/ind-as-41-agriculture/), Biological assets at point of harvest become inventory under Ind AS 2.
- [Ind AS 115](/ind-as-115-revenue-from-contracts-with-customers/), Recognition of cost of sales tied to revenue recognition.
- [AS 2](/as-2-valuation-of-inventories/), Equivalent inventories standard for non-Ind AS companies; substantively similar.
Need Help with Ind AS 2 Compliance?
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Our services include:
- Statutory Audit
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Frequently Asked Questions (FAQs)
All companies required to follow Indian Accounting Standards must comply with Ind AS 2 for their inventories. This includes listed companies meeting MCA thresholds and unlisted companies above prescribed net worth limits under the Companies Act, 2013 roadmap for Ind AS implementation.
Ind AS 2 permits specific identification (for non-interchangeable items), FIFO (first-in first-out), and weighted average cost methods for assigning costs to inventories. LIFO is strictly prohibited. Entities must apply the same formula consistently for similar types or uses of inventory items.
While both standards require inventories at lower of cost or net realisable value, Ind AS 2 mandates reversal of prior write-downs if NRV recovers. It also references borrowing costs per Ind AS 23 instead of legacy rules. Terminology aligns more closely with IFRS standards.
Net Realisable Value is calculated as the estimated selling price in the ordinary course of business minus estimated costs needed to complete sale, such as finishing expenses and selling costs. This ensures that obsolete or slow-moving stock is not overstated on the balance sheet.
An entity must reverse a previous write-down if circumstances that caused it no longer exist, for example, if market demand recovers or obsolescence issues resolve, subject to not exceeding original historical cost per Para 34 of Ind AS 2.
Borrowing costs can be included only if the inventory qualifies as a “qualifying asset” under Ind AS 23 Borrowing Costs. Otherwise, such interest expense should be recognised directly in profit or loss rather than capitalised into inventory value.
Fixed production overheads must be allocated based on normal production capacity over several periods, not actual output each year, to avoid distorting unit costs during periods of abnormal activity per Para 13. Unallocated overhead due to low output is expensed immediately.
Auditors frequently observe use of LIFO method despite prohibition; failure to test for NRV declines; incorrect inclusion of non-production overheads; improper allocation basis for fixed overhead; omission of required disclosures; or failure to reverse prior write-downs when justified by recovery.
Selling expenses, including marketing salaries, distribution charges unrelated to bringing goods into saleable condition, must not be included in the cost of inventories under Ind AS 2. Only direct acquisition or conversion-related expenses may be capitalised into closing stock values.
Yes. Schedule III requires disclosure by classification, raw materials, work-in-progress, finished goods, and mandates separate reporting if any portion is pledged as security against borrowings. These requirements supplement those set out specifically by Para 36(a)-(h) in Ind AS 2.
About This Article
Reviewed by CA & CS Team · Patron Accounting LLP
Technical reviewer: CA Sundram Gupta, FCA
Last reviewed: 2026-05-02
Sources: ICAI Compendium of Accounting Standards · MCA Notification (Companies (Indian Accounting Standards) Rules, 2015, dated 16 February 2015) · IFRS Foundation