Writing inventory down to net realisable value

How to test a client's inventory against net realisable value at year end, which lines to look at first, and how to record and evidence a write-down.

By Achekam · 11 October 2026 · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya

Every stockroom has a corner nobody likes to talk about. The clothing retailer has last winter's coats. The electronics dealer has phones two models out of date. The agricultural supplier has a pallet of fertiliser whose bags split in the rains. At cost, these items sit in closing inventory looking like assets. At what they will actually fetch, some are worth a fraction of that, and a few are worth nothing.

The net realisable value test is how that gap reaches the statements. It is one of the most judgement-heavy parts of a small client's year end, and one of the easiest for a reviewer to challenge if the evidence is thin. This article covers the rule, how to estimate the figures, where to look, and how to record and document a write-down.

Lower of cost and net realisable value

Under IAS 2, inventories are measured at the lower of cost and net realisable value. Cost is the starting point; net realisable value is the ceiling. Where net realisable value falls below cost, the inventory is written down to it.

ACCA's article on year-end adjustments puts the practical consequence simply: because IAS 2 requires inventories to be included at the lower of cost and net realisable value, damaged or slow-moving items may need to be written down, which increases cost of sales and reduces inventory.

The test only works if cost itself is right. A client whose cost figures come from an out-of-date system price should have cost corrected first, as discussed in FIFO, weighted average or specific identification.

Estimating selling price less costs to complete and sell

IAS 2 defines net realisable value as the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Each part of that definition needs evidence:

• Estimated selling price in the ordinary course of business. What the item is likely to sell for through the client's normal channels, not the list price on the shelf and not a fire-sale figure unless a fire sale is genuinely the plan. Sales shortly after year end are often the best evidence.
• Estimated costs of completion. For goods not yet finished, what it will still cost to finish them. A manufacturer's half-built stock may be worth less than cost once the remaining work is counted.
• Estimated costs necessary to make the sale. Commission, delivery, repackaging, marketing for a clearance. A product that sells only through an agent on commission has a lower net realisable value than its price suggests.

For a retailer of fast-moving goods, the test may show no write-down at all for most lines. That is a perfectly good outcome, provided the work shows it.

Damaged, slow-moving and discontinued lines

Rather than test every product, start where write-downs are likely:

1. Damaged stock noted at the count. Make sure the count instructions ask counters to flag damage and to note it on the sheets.
2. Slow-moving stock, identified from the client's ageing or last-sale date report. Items with no sales for a long period deserve a close look.
3. Discontinued or superseded lines, such as old models, last season's ranges or packaging the client no longer uses.
4. Lines selling below cost after year end, found by comparing post-year-end invoices with cost.
5. Goods with a short shelf life approaching expiry: food, medicine, chemicals.

For each, record the cost, the estimated selling price, the estimated costs to complete and sell, and the source of each estimate. Ask the client's buyer or store manager for their view, and record who said what. Their knowledge of the market is evidence; their optimism is not.

Recording the write-down in cost of sales

Under IAS 2, the amount of any write-down of inventories to net realisable value, and all losses of inventories, are recognised as an expense in the period the write-down or loss occurs. IAS 2 also states that when inventories are sold, their carrying amount is recognised as an expense in the period in which the related revenue is recognised. The write-down therefore belongs to the year in which the value fell, not the year the goods are eventually cleared.

A worked example in words. The agricultural supplier's split fertiliser bags can still be sold, repacked, at a discount through its usual dealers. The preparer estimates the discounted price from the dealers' offers, deducts the cost of repacking and the dealers' commission, and finds the result below cost. The difference is posted as a write-down that increases cost of sales and reduces inventory, and the working paper records the dealer offers and the repacking quote.

In Achekam, the write-down is posted as a year-end adjusting entry in the Studio. An entry that later proves wrong is reversed with a record of who did it and why, not deleted. Where the client's own books run on Achekam and a write-down journal is proposed from a document or adjustment through Financial Intake, it remains a posting candidate: only a person can approve and post it, and AI is refused both steps. Either way, the decision to write stock down stays with people who can explain it.

Evidence to keep for the reviewer

A reviewer looking at a net realisable value write-down, or at the absence of one, will want to see:

• the count notes on damage and obsolescence;
• the ageing or slow-moving report, with the lines selected for testing;
• post-year-end sales invoices or price lists used for selling prices;
• quotes or estimates for completion and selling costs;
• the client's explanation for any line written down heavily or not at all;
• the calculation, line by line, agreeing to the adjusting entry.

Where the client's inventory figure came from its own stock system, the reviewer will also want the reconciliation from system to count to ledger, discussed in inventory from client stock records.

ACCA's technical article on year-end adjustments explains how to process the main post-trial-balance adjustments, inventory among them, and is a good refresher for anyone new to the year-end file. Before this year's count, make sure the count instructions ask for damaged and slow-moving stock to be flagged; most of the evidence starts on the count floor.

General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.