Why it matters
Blending unsold units into one project-level NRV test can hide unit-type-specific losses and materially overstate inventory; when prices later recover, a write-down left frozen instead of reversed understates both inventory and profit for the period. Getting the aggregation level and the reversal trigger wrong directly misstates reported margins on completed and under-construction stock.
Diagnostic questions
Is NRV being tested at the individual unit-type level (groups of interchangeable units), rather than blended across a whole phase or project? Is a write-down on one unit type prevented from being netted against a surplus on a different unit type in the same phase? Have market prices for previously written-down unit types recovered durably enough to warrant a reversal, capped at original cost? Are remaining costs to complete and selling costs deducted once (in the NRV test) and not again when actually expensed through cost of sales?
Recognition
1) Segment the unsold portfolio into groups of interchangeable items (normally unit type within a phase, e.g. all standard two-bedroom units), not by project as a whole. 2) For each group, compare total carrying cost to total estimated NRV (selling price in the ordinary course less costs to complete and costs to sell). 3) Where NRV is below cost for a group, recognize a write-down for that group only; do not net it against a surplus on a different unit type or phase. 4) At each subsequent reporting date, reassess NRV for previously written-down groups. 5) If the reason for the write-down has clearly and durably reversed (not a temporary price blip), reverse the write-down, limited to the lower of the recovered amount and the original cost (i.e. never above original cost). 6) Recognize the reversal as a reduction of cost of sales / inventory expense in the period of reversal, and document the evidence supporting that the recovery is not temporary.
Measurement
Measure NRV at the group (unit-type) level as estimated selling price in the ordinary course of business less estimated costs to complete (for units still under construction) and estimated costs necessary to make the sale (marketing, selling commissions, transfer fees). Carry inventory at the lower of cost and NRV group by group. On reversal, remeasure up to the new NRV but cap the carrying amount at original cost, never revalue inventory above its historical cost. Reassess costs-to-complete estimates each period as construction progresses, since they directly change the NRV calculation.
Presentation & disclosure
Disclose: accounting policy for determining NRV and the level of aggregation used (unit type/phase); amount of inventories carried at NRV versus cost; amount of write-down expensed in the period; amount of any reversal of write-down recognized in the period; circumstances/events that led to the reversal; total carrying amount of inventories by category (completed units, under construction, land bank).
Common mistakes
- Blending all unsold units in a project into one NRV calculation, masking losses on specific slow-moving unit types with surpluses on others
- leaving a write-down frozen after prices recover instead of reversing it, or reversing it beyond the original write-down amount
- deducting estimated costs to complete twice, once in the NRV calculation and again when actually expensing them through cost of sales as construction proceeds
- using stale or budget-based selling prices instead of current market evidence when testing NRV
- reversing a write-down based on a short-term uptick without evidence the recovery is durable.
Simple example
A developer holds 40 unsold two-bedroom units at cost of SAR 900,000 each (total SAR 36,000,000). At year-end 1, a soft market drops estimated selling price so unit-level NRV is SAR 820,000 (selling price SAR 850,000 less costs to sell SAR 30,000), a write-down of SAR 80,000/unit = SAR 3,200,000 in total. Larger penthouse units in the same phase remain above cost and are not written down (no offset permitted). Journal entry, year-end 1: Dr Cost of sales (inventory write-down) 3,200,000 Cr Inventory - completed units 3,200,000 At year-end 2, the market recovers and NRV for the two-bedroom units rises to SAR 870,000 (selling price SAR 900,000 less costs to sell SAR 30,000). The recoverable increase is capped at the original write-down: min(870,000-820,000, 80,000) = SAR 50,000/unit x 40 units = SAR 2,000,000. New carrying amount per unit = 820,000 + 50,000 = SAR 870,000, still below original cost of SAR 900,000. Journal entry, year-end 2 (reversal): Dr Inventory - completed units 2,000,000 Cr Cost of sales (reversal of write-down) 2,000,000
Professional judgment
Two judgments dominate: (1) the right level of aggregation, units must be interchangeable in nature and use to be grouped; grouping unlike unit types (e.g. combining studios with penthouses) to smooth results is not appropriate, while excessive granularity (unit by unit within an identical unit type) can be impractical, so the test is normally performed at the unit-type/phase level supported by a clear rationale; and (2) evidencing that a price recovery driving a reversal is genuine and durable (e.g. sustained transaction evidence, updated third-party market data, signed reservations at recovered prices) rather than a short-term fluctuation, since reversing a write-down on weak evidence overstates inventory and profit.
Source basis
IAS 2 · Inventories
Paragraph references
Verified against the official standard texts used in the IFRS Expert skill.
Related issues
Educational and navigation content only. Not professional advice. Does not reproduce official IFRS/IAS text. Consult the authoritative standards and qualified professionals; professional judgment may still be required.