Valuation of Inventory in India: Ind AS 2 Methods, Net Realisable Value, and When You Need an Independent Valuer

Key Takeaways

• LIFO is prohibited in India. Both Ind AS 2 and AS 2 permit only FIFO and Weighted Average Cost. LIFO is also disallowed under IFRS. Any guidance recommending LIFO for an Indian business is outdated.
• Inventory is carried at the lower of cost and net realisable value (NRV) — not at cost, and not at market. When NRV falls below cost, the difference is written down to expense in the period.
• Cost under Ind AS 2 includes purchase cost, conversion cost and all costs of bringing inventory to its present location and condition — but excludes abnormal waste, storage (unless necessary in production), most selling costs and, generally, interest.
• Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and estimated costs necessary to make the sale — an entity-specific figure, not a market price.
• The method a company chooses must be applied consistently for inventories of similar nature and use; a change is a change in accounting policy, not a free annual choice.

Inventory valuation is the process of assigning a monetary value to the stock a business holds — raw materials, work-in-progress and finished goods — at the reporting date. It determines the cost of goods sold, and therefore gross profit, taxable income and the inventory figure on the balance sheet.

Its impact runs wider than the income statement:

• Tax — inventory value directly affects taxable profit; the method must be consistent and defensible
• Lending — where stock is pledged, the lender’s drawing power depends on inventory value, so an inflated figure is a credit risk
• Investment and M&A — inventory is a due-diligence focus because it is one of the easiest figures to overstate
• Insolvency — under the IBC, inventory must be physically verified and valued as part of the corporate debtor’s assets
• Insurance — a stock loss claim turns on the value of inventory destroyed

The accounting method is routine. The valuation judgement — is this stock actually worth what the books say — is where the risk, and the need for an independent view, sits.

Two, and only two, for determining cost.

A trader’s movements in raw material during a month:

Under FIFO, the 150 units sold are assumed to be the oldest: 100 units at ₹50 + 50 units at ₹60.

• COGS = (100 × ₹50) + (50 × ₹60) = ₹5,000 + ₹3,000 = ₹8,000
• Closing stock (300 units) = remaining 150 at ₹60 + 150 at ₹70 = ₹9,000 + ₹10,500 = ₹19,500

Under Weighted Average (recomputed on each purchase, or periodic):

• Total cost available before sale = ₹5,000 + ₹12,000 = ₹17,000 over 300 units = ₹56.67/unit
• COGS on 150 units = 150 × ₹56.67 = ₹8,500
• Closing stock differs accordingly

The two methods produce different profit and different closing inventory from identical transactions — which is exactly why the choice must be consistent and disclosed, and why a lender or investor cannot simply accept the number without knowing the method behind it.

This is the heart of Ind AS 2, and the part most inventory content skips.

Inventory is not carried at cost. It is carried at the lower of cost and net realisable value. When NRV drops below cost — because stock is damaged, obsolete, slow-moving, or selling prices have fallen — the inventory is written down to NRV and the loss is recognised immediately.

Net Realisable Value = estimated selling price in the ordinary course of business − estimated costs of completion − estimated costs necessary to make the sale.

NRV is entity-specific. It is not the market price and not what a competitor might get — it is what this business can realistically realise, net of what it must still spend to sell.

Worked example

A batch of finished goods cost ₹10,00,000 to produce. At year-end:

• Estimated selling price in current market: ₹9,50,000
• Estimated completion/packing cost still to incur: ₹40,000
• Estimated selling and distribution cost: ₹30,000
• NRV = ₹9,50,000 − ₹40,000 − ₹30,000 = ₹8,80,000

Cost (₹10,00,000) exceeds NRV (₹8,80,000), so inventory is written down to ₹8,80,000 and a ₹1,20,000 write-down is charged to the period.

Where the judgement — and the disputes — live:

• Is this stock genuinely slow-moving or obsolete?
• What is a realistic selling price for aged inventory?
• Should a provision be recognised, and how much?

These are not arithmetic questions. They are judgement calls that auditors challenge, lenders discount, and acquirers reprice — which is precisely where an independent inventory valuation earns its place.

Related: Valuation of Stocks and Inventory · Valuation for Financial Reporting

More than the purchase invoice, and less than many businesses assume.

Not sure whether your inventory number needs an independent view? If stock is pledged to a lender, part of a transaction, subject to a claim, or material to your audit, an independent valuation protects the number. Talk to an IBBI Registered Valuer →

Routine period-end inventory is an accounting exercise. These situations call for an independent valuer, because a self-reported number is not enough:

Related: Valuation under IBC · Insurance Survey and Loss Assessment · Due Diligence

1. Using or citing LIFO. Prohibited under Ind AS 2, AS 2 and IFRS. If it appears anywhere in your policy or your advisers’ guidance, it is wrong for India.
2. Carrying inventory at cost, ignoring NRV. The rule is lower of cost and NRV. Skipping the NRV test overstates assets and profit and invites an audit qualification.
3. Loading period costs into inventory. Abnormal waste, storage and selling costs are expenses, not inventoriable cost.
4. Inconsistent method application. Switching between FIFO and weighted average to manage profit is a change in accounting policy with disclosure consequences, not a free choice.
5. Taking management’s stock number at face value in a deal or a loan. Inventory is where overstatement hides. Independent verification is cheap relative to the exposure.

1. Is LIFO allowed in India?

No. LIFO is prohibited under both Ind AS 2 and AS 2, and it is also disallowed under IFRS. Indian businesses may determine inventory cost only by FIFO or Weighted Average Cost, with Specific Identification for non-interchangeable items. LIFO remains permitted under US GAAP, which is why much online content still features it.

2. How is inventory valued under Ind AS 2?

Inventory is measured at the lower of cost and net realisable value. Cost is determined using FIFO or Weighted Average Cost and includes purchase cost, conversion cost and costs of bringing inventory to its present location and condition. Where net realisable value falls below cost, inventory is written down and the loss recognised in that period.

3. What is net realisable value?

Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. It is entity-specific — what this business can realistically realise net of remaining costs — rather than a general market price.

4. Which is better, FIFO or Weighted Average?

Neither is universally better; they suit different situations. FIFO reflects a realistic physical flow for perishable or dated goods and, when prices rise, reports higher profit and a higher closing inventory. Weighted Average smooths cost fluctuations and suits large volumes of interchangeable items. The choice must be applied consistently for inventories of similar nature and use.

5. Does the inventory valuation method affect tax?

Yes. Because the method changes cost of goods sold, it changes taxable profit. The method must be consistent and defensible; arbitrary changes to manage tax are treated as a change in accounting policy and can be challenged.

6. What costs are excluded from inventory cost under Ind AS 2?

Abnormal waste of materials, labour or overheads; storage costs unless necessary before a further production stage; administrative overheads not related to bringing inventory to its present condition; selling and distribution costs; and, generally, borrowing costs. These are period expenses, not inventoriable cost.

7. When does inventory need to be valued by an independent valuer?

When stock is pledged as loan security, when inventory forms part of M&A or fundraising due diligence, in a CIRP under the IBC where Regulation 35 requires physical verification, in an insurance claim for stock loss, and where a material write-down to net realisable value requires an independent assessment. In these situations a self-reported figure carries limited weight.

8. Can a company change its inventory valuation method?

A change from one permitted method to another is a change in accounting policy, applied only where it results in more reliable and relevant information, with retrospective effect and disclosure. It is not a discretionary annual choice, and unexplained changes attract scrutiny from auditors and tax authorities.

9. How is inventory valued in an insolvency (CIRP)?

Under Regulation 35 of the CIRP Regulations, registered valuers determine fair value and liquidation value of the corporate debtor’s assets, including inventory, after physical verification. In a distressed context, realisable value can be well below book cost, particularly for work-in-progress, aged stock and specialised materials with a narrow buyer base.