Write-down to net realisable value

Learning objectives

• Explain why cost may not be recoverable (damage, obsolescence, decline in selling prices, increase in the estimated costs of completion or of making the sale) and why an asset should not be carried in excess of the amounts expected to be realised from it.L1
• Calculate net realisable value (estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale) and the write-down item by item, or by groups of similar items where appropriate.L1, L2, L3
• Evaluate estimates of net realisable value on the basis of the evidence available at the time the estimates are made, including events after the reporting period that confirm conditions existing at the end of the period.L3, L4
• Recognise a write-down of inventories.L2, L3

Normative references

• IAS 2 §28The cost of inventories may not be recoverable if they are damaged, if they have become wholly or partially obsolete, if their selling prices have declined, or if the estimated costs of completion or of making the sale have increased. Writing inventories down to net realisable value is consistent with the view that assets should not be carried in excess of the amounts expected to be realised from their sale or use.
• IAS 2 §29Inventories are usually written down to net realisable value item by item. It may sometimes be appropriate to group similar or related items, for example items of the same product line that have similar purposes or end uses, are produced and marketed in the same geographical area and cannot practicably be evaluated separately. It is not appropriate to write inventories down on the basis of a classification of inventory (for example, all finished goods) or of all the inventories in a particular operating segment.
• IAS 2 §30Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made of the amount the inventories are expected to realise. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

17 questions

• Domélec, a distributor of household appliances, holds three unrelated lots of goods at the reporting date; according to the facts of the case, no grouping is appropriate. Lot R: cost {cost_r}, estimated selling price {price_r}, estimated selling costs {sell_r}. Lot S: cost {cost_s}, estimated selling price {price_s}, estimated selling costs {sell_s}. Lot T: cost {cost_t}, estimated selling price {price_t}, estimated selling costs {sell_t}. No costs of completion are to be incurred. Compute the total amount of inventories at the reporting date and the total write-down.L3
• The Aérotech group manufactures cabin equipment. At the reporting date, it holds a passenger seat in progress and a completed cabin panel, two separate items that the facts of the case do not allow to be grouped. Seat in progress: cost incurred {cost_w}, estimated selling price once completed {price_w}, estimated costs of completion {completion_w}, estimated selling costs {sell_w}. Completed panel: cost {cost_f}, estimated selling price {price_f}, estimated selling costs {sell_f}. What is the total amount of these inventories in the statement of financial position, and what write-down must be recognised?L3
• The wholesaler Rouelibre holds two models of city bicycles, each measured separately according to the facts of the case. Alto model: {units_a} units, unit cost {unit_cost_a}, estimated unit selling price {unit_price_a}, estimated unit selling costs {unit_sell_a}. Brio model: {units_b} units, unit cost {unit_cost_b}, estimated unit selling price {unit_price_b}, estimated unit selling costs {unit_sell_b}. Compute the total amount of the bicycles in inventories and the write-down to be recognised.L3
• The cost of inventories that are damaged or have become obsolete may not be recoverable; those inventories are then written down to net realisable value.L1
• Which idea underlies writing inventories down to net realisable value?L1
• Jouets Pimprenelle is preparing its year-end. Which of the following situations may make the cost of its inventories not recoverable?L1
• Horlogerie Vasselin holds a batch of watches from a past collection, with a cost of {cost}. Their estimated selling price in the ordinary course of business is {selling_price}, and the estimated costs necessary to make the sale (resellers' commissions) amount to {selling_costs}. Calculate the net realisable value of the batch and the amount of the write-down.L1
• At the reporting date, Charpentes Valdor holds a steel frame in the course of production, on which costs of {cost_incurred} have been incurred. Once completed, it is expected to be sold for {selling_price}. Estimated costs of completion of {completion_costs} remain to be incurred, and delivery and installation at the customer's site, borne by Valdor, will cost {selling_costs}. Determine the net realisable value of the work in progress and any write-down.L2
• At the reporting date, Sports Altitude holds three unrelated items that do not meet the conditions for grouping (case data): skis (cost {ski_cost}, net realisable value {ski_nrv}), tents (cost {tent_cost}, net realisable value {tent_nrv}) and GPS watches (cost {gps_cost}, net realisable value {gps_nrv}). Calculate the total write-down and the carrying amount of the three items after the write-down.L2
• Atelier Brunhilde manufactures furniture. At the reporting date, its inventories comprise three distinct, unrelated products. Finished lamps: cost {lamp_cost}, estimated selling price {lamp_price}, selling costs {lamp_selling_costs}. Finished tables: cost {table_cost}, estimated selling price {table_price}, selling costs {table_selling_costs}. Sideboards in progress: cost incurred {cabinet_cost}, estimated selling price once completed {cabinet_price}, costs of completion {cabinet_completion}, selling costs {cabinet_selling_costs}. Calculate the total write-down and the total carrying amount of these inventories.L3
• At the reporting date, Lunetterie Opaline holds frames from a collection that has become obsolete, with a cost of {cost}. Their net realisable value, estimated from clearance prices, is {nrv}. Record the write-down entry.L2
• At the reporting date, Cycles Arvelle holds electric bikes of a superseded model, with a cost of {bike_cost}, an estimated selling price of {bike_price} and estimated costs necessary to make the sale of {bike_selling_costs}. It also holds accessories unrelated to this model, with a cost of {accessory_cost} and a net realisable value of {accessory_nrv}. The finance director proposes recording nothing, as the unrealised gain on the accessories covers the loss on the bikes. Record the required entry.L3
• The management accountant of Textiles Brenne compares the total cost of finished goods (500,000) with their total net realisable value (520,000) and concludes that no write-down is needed. However, the winter coat line, with a cost of 80,000, has a net realisable value of 62,000; for all other items, net realisable value exceeds cost. What is the error?L3
• Câbleries du Rhône has a reporting date of 31 December 20X1. A batch of copper cables is held in inventory at a cost of 210,000; based on the price lists in force at the reporting date, its net realisable value was estimated at 230,000. On 20 January 20X2, before the financial statements are finalised, quality control discovers an insulation defect caused during manufacture and present before the reporting date; the batch is sold to a customer who accepts a discount, for an amount net of costs to sell of 185,000. Which measurement should be used at 31 December 20X1?L3
• Conserverie Port-Lazare produces three ranges: canned sardines in three sauces (same purposes, produced and sold in the same geographical area, and which in practice cannot be evaluated separately from one another), soups in cartons and pet food. These ranges belong to two operating segments. At what level should the write-down of the sardines to net realisable value be assessed?L3
• Électronique Valbrune has a reporting date of 31 December 20X1. It holds 5,000 tablets of the same model, at a unit cost of 300. At the reporting date, the list price is 360 and the costs necessary to make the sale are estimated at 20 per unit. A competitor launched a more powerful model in November 20X1, which was already weighing on demand at the reporting date. In January 20X2, before the financial statements are finalised, Valbrune sells 1,200 tablets at 290 each, and its sales team states that the rest of the batch cannot be sold above that price, with selling costs remaining at 20 per unit. On 25 February 20X2, still before the financial statements are finalised, Valbrune decides to launch a new version of its tablet, which brings the price of the old model down to 240. Write a memo determining the measurement of the batch at 31 December 20X1.L4
• Atelier Norvane manufactures city bikes and racing frames. At the year-end, it holds two raw materials. Aluminium (cost €60,000, replacement cost €52,000) is used in the city bikes, whose expected unit cost is €400 for a net realisable value of €520. Carbon fibre (cost €90,000, replacement cost €75,000) is used in the racing frames, whose expected unit cost is €1,300 for a net realisable value of €1,150; the carbon fibre inventory is sufficient for 100 frames. For carbon fibre, management considers replacement cost to be the best available measure of its net realisable value. Which conclusion should be reached?L4