Concept Paper on Inventory Valuation
Concept Paper on Inventory Valuation brought out by ICAI and ICAI RVO
Introduction
Inventory valuation is a valuation activity undertaken to determine the value of inventory or closing stock as on the valuation date. Inventory is an asset for an organization and includes finished products, work in progress goods and raw materials.
The Ministry of Corporate Affairs has notified IND AS 2 “Inventories” and AS-2 “Valuation of Inventories” which prescribes the accounting treatment for Inventories in India. Both these Standards provides that the inventories shall be measured at the lower of cost and net realisable value. IND AS 2 deals with the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.
It is worth noting here that there is a thin line of difference between the book value of inventory and fair value of inventory. Book value based on historical costs ignores the value created as the inventory moves up the value chain, hence it is generally lower than the fair value of Inventory.
Ind AS 113 – Fair Value Measurement, defines fair value and sets out the framework for measuring fair value. However same does not specify guidelines particularly specific to Inventory.
The Institute of Chartered Accountants of India has also issued ICAI Valuation Standards 2018 comprising of 8 standards on various aspects of valuation, but none of them specifically provides guidance relating to the valuation of Inventory.
Considering the above factors, this concept paper has been developed to discuss technicalities involved in the valuation of Inventory. The purpose of this concept paper is to outline the process for estimating the fair value of Inventory and to bring more uniformity in this area of valuation practice.
Physical verification of Inventory and/or determining the physical availability of the inventory is not considered within the scope of this concept paper.
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