Reversal of prior net realizable value write-downs

Failing to reverse a recovered NRV write-down permanently overstates cost of sales and understates inventory and profit, misleading users about true product-line profitability and inflating apparent conservatism; conversely, reversing above original cost or on flimsy evidence overstates profit and inventory, so getting the reversal mechanics precisely right (evidence, cap at cost, correct period) is essential for both earnings quality and inventory-based lending covenants.

Is inventory still carried at a prior-period NRV write-down being reassessed each reporting date against current selling prices and costs to complete/sell? Is there objective, sustained evidence (forward orders, contracts, a genuine demand recovery) rather than a temporary or seasonal price uptick, before reversing the write-down? Is the reversal correctly capped at the lower of new NRV and original cost, not allowed to exceed original cost?

1. At each reporting date, identify inventory items still carried at a written-down amount from a prior-period NRV adjustment.
2. Reassess current net realizable value for those items using up-to-date selling prices and estimated costs to complete and sell as of the current reporting date.
3. Confirm the reason for the original write-down (price decline, damage, obsolescence, slow movement) no longer exists, or that new evidence clearly shows an increase in NRV, rather than a short-term price fluctuation.
4. Calculate the reversal amount as the lower of (a) the amount needed to bring the item back up to the new NRV, and (b) the amount required to restore the item to its original cost - the reversal can never exceed original cost.
5. Recognize the reversal in the period it occurs as a reduction of cost of sales (inventory expense), not as other income or a prior-period adjustment.
6. Perform the reassessment item-by-item or by group of similar items, consistent with how the original write-down was determined, and document the evidence supporting the reversal.

Measurement basis: reassessed net realizable value equals estimated selling price in the ordinary course of business less estimated costs of completion and estimated costs necessary to make the sale, as of the current reporting date. Included: only the increase needed to restore the carrying amount up to the lower of new NRV and original cost. Excluded: any amount that would raise the carrying amount above original historical cost - this ceiling applies regardless of how much NRV has recovered. Remeasurement trigger: reassessment is required every reporting period for any inventory previously written down, driven by updated selling prices, input costs, demand signals, or usage (e.g., items consumed in production before a further reversal was recorded, which closes out the item's remaining write-down naturally).

Disclose: (1) the amount of inventory write-down reversals recognized as a reduction of cost of sales in the period; (2) the circumstances or events that led to the reversal (e.g., price recovery, renewed demand); (3) confirmation that reversals are capped at original cost, consistent with the write-down policy previously disclosed; (4) the carrying amount of inventories still carried below cost, if material, and the basis of measurement (lower of cost and NRV).

• Leaving old write-downs permanently on the books after market conditions clearly recover, understating inventory and overstating cost of sales in the current period
• reversing a write-down above the item'
• s original cost, effectively creating an unrealized revaluation gain that IAS 2 does not permit
• recognizing a reversal based on a short-term or speculative price uptick rather than clear, sustained evidence of improved NRV
• netting the reversal against a new, unrelated write-down on a different inventory category, obscuring the gross movement that should be separately evidenced
• failing to reverse at all because management assumes write-downs are one-way/permanent adjustments once recorded.