Inventory Write-Down to Net Realizable Value (Commodity Price Decline Post-Harvest)
Writing down harvested crop inventory to net realizable value (NRV) when market prices have fallen below the fair value recognized at harvest, under IAS 2's lower-of-cost-and-NRV rule.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Inventory Write-Down Expense (NRV Below Carrying Amount) | Expense (+) | 9,500.00 | - |
| Allowance for Inventory Write-Down (or direct reduction) | Asset (-) | - | 9,500.00 |
💡 Accountant's Note
At harvest, agricultural produce enters inventory at fair value (IAS 41 point of harvest measurement). But from that moment forward, IAS 2 governs — and IAS 2 requires inventory to be measured at the LOWER of cost and net realizable value. If commodity prices decline after harvest (e.g., an oversupply of grain depresses wheat prices by 20% between October harvest and December year-end), the inventory must be written down to NRV. NRV = Estimated selling price in the ordinary course of business minus estimated costs of completion and selling costs. The write-down creates a loss in P&L. If prices subsequently recover (in a later period), the write-down can be reversed up to the original cost under IAS 2 — but not above the original IAS 41 fair value at harvest.
Practitioner & Systems Framework
💻 ERP Architecture
Run an NRV test at every reporting period-end for all harvested commodity inventory. Use current quoted market prices (CBOT, ICE, LME) less estimated selling costs (transport, commission, handling) as the NRV. For physical commodities with active futures markets, the near-month futures price is a reliable NRV indicator.
⚠️ Audit Flags
(1) Completeness — is the NRV test applied to ALL agricultural inventory, not just items management identifies? (2) NRV inputs — are market prices observable and current at the balance sheet date? (3) Reversal — if previously written-down inventory is sold above the written-down value, is the reversal capped at original cost?
📄 Required Documentation
Commodity price data at period-end, inventory listing with quantities, NRV calculation worksheet, and reversals documentation in subsequent periods.
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