How to Write Down Finished Goods Inventory to Net Realizable Value Under IAS 2
Reducing the carrying value of finished goods when the expected selling price falls below the cost to manufacture them.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Cost of Goods Sold (or Loss) | Expense (+) | 2,000.00 | - |
| Finished Goods Inventory | Asset (-) | - | 2,000.00 |
💡 Accountant's Note
Under IAS 2, inventory must be reported at the lower of cost or NRV. If you can't sell the product for more than it cost to make, you must take the loss immediately.
Practitioner & Systems Framework
💻 ERP Architecture
NRV = Estimated Selling Price − Estimated Costs to Complete − Estimated Selling Costs. If NRV < Cost → write down to NRV; if NRV > Cost → no write-up above original cost. Perform an NRV test at each reporting date, by SKU or product line. Common triggers: market price decline, product obsolescence, damaged goods, end-of-life products, or excess inventory that will need to be discounted to sell. The write-down goes to COGS (not a separate loss line) under IAS 2, unless it is so large that it requires separate disclosure under IAS 1. If NRV recovers in a subsequent period, reverse the write-down (but only up to the original cost — IAS 2 allows reversal).
⚠️ Audit Flags
Auditors test NRV for slow-moving inventory (items with no sales in 6–12 months), products below cost in the price list, items in a declining market, and goods past their best-before or expiry date. Management's NRV estimates require supporting evidence — sales price list at the reporting date, recent actual sales prices, and selling cost estimates. Overly optimistic NRV assessments that avoid write-downs require challenge.
📄 Required Documentation
Selling price list at the reporting date, estimated selling costs (commission, freight, packaging), NRV calculation by SKU, comparison of NRV to carrying cost, write-down entry, inventory aging report, slow-moving inventory analysis, and subsequent period reversal assessment (if prices recover).
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Expert Analysis by Qusai Ahmad
General Accountant Supervisor & IFRS Specialist
Specialized in SAP GUI automation and Middle Eastern tax compliance. Building digital tools for the next generation of finance leaders.