Income Computation and Disclosure Standard (ICDS) II – Valuation of Inventories
ICDS-II governs the valuation of inventories for income computation under the head “Profits and Gains of Business or Profession.” As per Section 145A, inventories must be valued at the lower of cost or net realisable value (NRV) in accordance with ICDS.
- Scope –ICDS-II applies to the valuation of inventories, except for:
Work-in-progress covered under ICDS-III (Construction Contracts).
Work-in-progress dealt with by other ICDS.
Securities held as stock-in-trade (covered under ICDS-VIII).
Inventories of producers of livestock, agriculture, mineral oils, ores, and gases measurable at NRV.
Machinery spares used only for fixed assets.
- Valuation of Inventories –Inventories must be valued at the lower of cost or NRV, except in the case of:
Dissolution of Firm/AOP/BOI: Inventory is valued at NRV, irrespective of business continuation.
Raw Material & Supplies: If finished goods are expected to be sold at or above cost, raw materials need not be written down. However, if their cost exceeds NRV, they should be valued at replacement cost.
By-products, Scrap, Waste: If immaterial, they should be measured at NRV and deducted from the main product’s cost.
NRV is the estimated selling price reduced by costs of completion and selling expenses. Inventories should be written down item-by-item, unless similar items belong to the same product line.
- Reversal of Write-downs –ICDS-II allows reversal of inventory write-downs if NRV increases beyond the previously recorded cost.
- Cost of Inventoriesincludes:
Cost of Purchase: Purchase price, non-refundable taxes, freight, and directly attributable costs (net of trade discounts).
Cost of Services: Labour and other costs incurred in acquiring or manufacturing inventories.
Cost of Conversion: Direct production costs, allocated fixed and variable overheads.
Other Costs: Any necessary expenses to bring inventories to their current condition and location.
and excludes:
Abnormal wastage.
Storage costs (unless necessary for production).
Administrative overheads unrelated to production.
Selling costs.
- Methods for Cost Measurement– ICDS-II allows:
Specific Identification Method: Used for unique or segregated items.
FIFO (First-In-First-Out) Method: Assumes earliest purchases are sold first.
Weighted Average Cost Method: Averages cost over time.
LIFO (Last-In-First-Out) is not permitted.
- Alternative Cost Measurement Techniques
Standard Costing Method: Based on normal consumption, efficiency, and capacity.
Retail Method: Used in the retail industry by applying gross margins to selling prices.
Once a method is adopted, it cannot be changed without reasonable cause.
- Disclosures inForm 3CD
Accounting policies for inventory valuation.
Cost formula used.
If standard costing is applied, confirmation that it approximates actual cost.
Total inventory value and classification.