Inventory Write-Down
An inventory write-down reduces the carrying value of inventory to its net realisable value when NRV falls below cost, as required by Ind AS 2, and is immediately recognised as an expense in the profit and loss account.
Ind AS 2, which governs the accounting for inventories, mandates that inventories are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale. When market conditions, product obsolescence, damage, or other factors cause the NRV to fall below the cost at which inventory was recorded, the carrying value must be written down to NRV, with the difference charged as an expense.
The pharmaceutical sector illustrates this principle vividly. Medicines have regulatory expiry dates, and inventory held beyond its shelf life cannot be sold. Companies manufacturing or distributing pharmaceutical products must regularly evaluate whether their inventory will be consumed or sold within the remaining shelf life. Any material that is unlikely to be sold before expiry, or that has already expired, must be fully written off. Regulators such as the Drugs Controller General of India prescribe destruction protocols for expired drugs, and the write-off cost can be substantial for companies that misforecast demand or face unexpected product recalls.
FMCG companies face seasonal inventory risks. Products such as woollen garments, festive confectionery, or agricultural inputs tied to a specific cropping season lose their saleability rapidly once the season passes. If a company over-produces ahead of a seasonal peak and fails to liquidate excess inventory before the season closes, it must mark down the carrying value to the reduced post-season NRV — which may be the distressed bulk sale price.
For commodity-linked industries such as metals, chemicals, or agricultural processing, falling market prices can trigger widespread NRV write-downs across the sector simultaneously. The write-down is not a cash outflow at the time it is recognised — the cash was spent when the inventory was acquired — but it directly reduces reported profit and therefore affects earnings per share, return ratios, and borrowing covenant compliance.
Analysts should watch the notes to financial statements for inventory write-down disclosures. Recurring write-downs in the same business year after year may indicate poor demand forecasting, procurement inefficiencies, or aggressive inventory recognition policies. Companies sometimes reverse prior write-downs when NRV recovers above the written-down value, which creates a credit to the profit and loss account. Tracking these movements across periods provides insight into the reliability of management's NRV assessments.