How Are Inventories Written Down to Net Realisable Value, and When Is the Write-Down Reversed?
Net realisable value under IAS 2 (TMS 2): item versus group write-downs, the raw materials rule, the reversal cap and BOBİ FRS differences, with a worked example and illustrative entries.
Net realisable value is the net amount an entity expects to realise from the sale of inventory in the ordinary course of business. Writing inventories down to net realisable value ensures that assets are not carried above the amounts expected to be realised from their sale or use. The questions that come up most often in practice are the level at which the write-down is made (item or group), when raw materials are written down, and when and by how much an earlier write-down is reversed. This article explains the IAS 2 (TMS 2) requirements with a worked example and compares them with BOBİ FRS.
Short Answer
Inventories are measured at the lower of cost and net realisable value (TMS 2, paragraph 9). Net realisable value is the estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale (TMS 2, paragraph 6). Write-downs are usually made item by item; similar or related items may be grouped in certain circumstances, but writing down a whole classification such as all finished goods is not appropriate (TMS 2, paragraph 29). The write-down is expensed in the period it occurs. When the circumstances that caused it no longer exist, the write-down is reversed; the reversal is limited to the amount of the original write-down, so inventory cannot rise above cost (TMS 2, paragraphs 33 and 34).
Requirements that apply
| Paragraph | Topic |
|---|---|
| 6–7 | Definition of net realisable value; an entity-specific value |
| 9 | Lower of cost and net realisable value |
| 28–29 | Rationale for write-downs; item-by-item and group basis |
| 30–31 | Evidence used in estimates and purpose for which inventory is held |
| 32 | Materials and supplies |
| 33–34 | Reassessment, reversal and recognition in profit or loss |
| 36 | Disclosures |
How is net realisable value estimated?
Estimates are based on the most reliable evidence available at the time they are made. Price and cost changes after the reporting period are taken into account to the extent that they confirm conditions existing at the end of the period (TMS 2, paragraph 30). Sales of inventory after the reporting period can provide evidence of net realisable value at period end; IAS 10 lists this among adjusting events (TMS 10, paragraph 9).
The purpose for which inventory is held also matters. For inventory held to satisfy firm sales contracts, net realisable value is based on the contract price; general selling prices are used for quantities exceeding the contract (TMS 2, paragraph 31). Net realisable value is entity-specific and may not equal fair value less costs to sell (TMS 2, paragraph 7).
When are raw materials written down?
Materials held for use in production are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. When a decline in the price of materials indicates that the cost of the finished products exceeds net realisable value, the materials are written down; replacement cost may then be the best available measure of their net realisable value (TMS 2, paragraph 32). A fall in the market price of a raw material does not, on its own, require a write-down.
Worked example
Amounts are hypothetical. Tax effects are ignored.
Assumptions (31 December 2026)
| Item | Cost | Estimated selling price | Costs of completion | Costs to sell | Net realisable value | Carrying amount |
|---|---|---|---|---|---|---|
| Finished good A | 200,000 | 245,000 | 0 | 15,000 | 230,000 | 200,000 |
| Finished good B | 150,000 | 140,000 | 0 | 10,000 | 130,000 | 130,000 |
| Work in progress C | 80,000 | 70,000 | 5,000 | 3,000 | 62,000 | 62,000 |
Calculation
Net realisable value = Estimated selling price − Estimated costs of completion − Estimated costs to sell
- A: 245,000 − 15,000 = TRY 230,000. Above cost; no write-down.
- B: 140,000 − 10,000 = TRY 130,000. Write-down 150,000 − 130,000 = TRY 20,000.
- C: 70,000 − 5,000 − 3,000 = TRY 62,000. Write-down 80,000 − 62,000 = TRY 18,000.
Total write-down = 20,000 + 18,000 = TRY 38,000. Total carrying amount of inventories 200,000 + 130,000 + 62,000 = TRY 392,000.
Independent check and the grouping error
Total cost is TRY 430,000 and total carrying amount TRY 392,000; the TRY 38,000 difference agrees with the sum of item-level write-downs. Had the items been assessed as a single group, total net realisable value would be 230,000 + 130,000 + 62,000 = TRY 422,000, and only TRY 8,000 would be written down. The unrealised gain on A would offset the losses on B and C. TMS 2, paragraph 29 does not allow this offset; the TRY 30,000 difference would be an understatement of the write-down.
Next period: reversal
In 2027 item B is still held; its estimated selling price rises to TRY 175,000 and costs to sell stay at TRY 10,000. New net realisable value is TRY 165,000. Although the carrying amount is TRY 130,000, inventory cannot be carried above cost (TRY 150,000). The reversal is limited to 150,000 − 130,000 = TRY 20,000, and the new carrying amount is TRY 150,000 (TMS 2, paragraph 33).
Illustrative journal entries
Turkish uniform chart of accounts codes are used as a familiar frame. IAS 2 does not specify the line item in profit or loss for write-downs; cost of sales is used here and the choice should be applied consistently.
| Account | Debit | Credit |
|---|---|---|
| 620 Cost of goods sold (inventory write-down) | 38,000 | |
| 158 Allowance for inventory write-down (−) | 38,000 |
| Account | Debit | Credit |
|---|---|---|
| 158 Allowance for inventory write-down (−) | 20,000 | |
| 620 Cost of goods sold (reversal of write-down) | 20,000 |
When work in progress C is sold in 2027, the TRY 18,000 allowance is released to cost of sales together with the inventory.
Effect on the financial statements
- 2026: inventories TRY 392,000; cost of sales increases by TRY 38,000.
- 2027: the reversal of TRY 20,000 reduces the amount of inventories recognised as an expense (TMS 2, paragraph 34).
- The notes disclose the write-down for the period, any reversal and the circumstances that led to the reversal (TMS 2, paragraph 36).
Position under BOBİ FRS
BOBİ FRS also measures inventories at the lower of cost and net realisable value and defines net realisable value in the same way (BOBİ FRS, paragraph 6.4). Impairment is generally tested item by item, with grouping permitted in similar circumstances (BOBİ FRS, paragraph 6.23). The rule on raw materials matches IAS 2 (BOBİ FRS, paragraph 6.24). Reversals are limited to cost (BOBİ FRS, paragraph 6.25).
The difference is presentation: BOBİ FRS explicitly requires the impairment loss to be presented in “cost of sales” in the statement of profit or loss (BOBİ FRS, paragraph 6.22). Under TFRS the line item is left to accounting policy. BOBİ FRS is a Turkish framework and is not equated with IFRS here.
Common mistakes in practice
- Assessing all finished goods as a single group and offsetting profitable items against loss-making ones.
- Omitting costs to sell (commissions, freight) from net realisable value.
- Writing raw materials down to market price while finished products are still sold at a profit.
- Reversing above cost, or presenting the reversal as income.
- Using post-period-end prices without assessing whether they confirm period-end conditions.
- Not ageing slow-moving and obsolete inventory.
Checklist
- Is net realisable value calculated item by item? If items are grouped, are the conditions in TMS 2, paragraph 29 documented?
- Are costs of completion and costs to sell included in the estimate?
- Has inventory held for firm sales contracts been assessed separately?
- Have prior write-downs been reassessed, and are reversals capped at cost?
- Are write-downs, reversals and their causes disclosed?
For determining cost see which costs are included in inventory; for the comparison with net realisable value under inflation accounting see restating inventories under IAS 29.
Sources
- KGK, TMS 2 Inventories, TFRS 2026 Set (Blue Book) (Turkish)
- KGK, TMS 10 Events after the Reporting Period, TFRS 2026 Set (Blue Book) (Turkish)
- KGK, BOBİ FRS, 2021 version (Turkish)
This article is for general information. The standard text and professional judgement should be applied to the specific facts of an entity.