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For CFA® Level I, calculate net realisable value by subtracting the costs still needed to finish and sell inventory from its expected selling price. Under IAS 2, compare that net amount with inventory cost and carry the inventory at the lower figure. The difference, when net realisable value is lower, is the write-down.
Start with the amount the inventory can actually recover
An expected selling price is not the amount a business keeps. It may need further work on the goods and incur costs to make the sale. IAS 2 from the IFRS Foundation defines net realisable value using those deductions and requires inventory to be measured at the lower of cost and that amount. CFA Institute includes this measurement and its effects on statements and ratios in its Analysis of Inventories reading.
Make the comparison on a consistent basis: cost per unit against net realisable value per unit, or total cost against total net realisable value for the same inventory. A selling price above cost does not prevent a write-down if the remaining costs push the net amount below cost.
An illustrative batch
Suppose an invented batch contains 100 identical units. Each unit cost £50, could sell for £47, and still needs £2 of completion work and £1 of selling costs. These are illustrative amounts, not company data.
| Original cost | £50 | £5,000 |
| Estimated selling price | £47 | £4,700 |
| Completion and selling costs | £3 | £300 |
| Net realisable value | £44 | £4,400 |
| Write-down | £6 | £600 |
Subtract £2 and £1 from the £47 expected selling price to get £44 net realisable value per unit. Compared with £50 cost, that leaves a £6 write-down per unit, or £600 for the batch. The closing inventory carrying amount becomes £4,400. IAS 2 requires the write-down to be recognised as an expense in the period it occurs, so both reported inventory and that period’s profit fall by £600, before any tax effect.
The exam mistake to catch
The tempting shortcut is to compare £47 directly with £50 and record only £300 for the batch. That ignores the £3 per unit still needed to complete and sell it. Write the two deductions down before making the cost comparison; it also makes the direction of the financial statement effect easier to check.
If you are revising this alongside other financial statement topics, use the CFA programme overview for the broader context and the study methodology to organise a short calculation and explanation cycle.
Sources
- Analysis of Inventories | CFA Institute · cfainstitute.org · Retrieved
- IAS 2 Inventories | IFRS Foundation · ifrs.org · Retrieved
