Retail inventory costing and NRV

Retailers commonly use the retail inventory method (RIM) as a practical expedient to estimate cost for large volumes of fast-moving stock across many SKUs, but RIM only estimates cost - it does not exempt management from testing year-end carrying amounts against net realisable value (NRV) under IAS 2. Seasonal apparel, electronics, and FMCG are especially exposed to obsolescence, technology cycles, and post-season markdowns, so a cost figure that looked correct at purchase can quickly exceed what the goods will actually sell for. Failing to write inventory down to NRV overstates both inventory and profit, and the error compounds each reporting period until a markdown event forces recognition. Getting this right protects the integrity of gross margin reporting and gives management an early warning signal on slow-moving or dead stock.

Is the retail inventory method's cost-to-retail ratio reviewed regularly by department/category and does it still approximate actual cost? Have markdowns for seasonal, discontinued, or slow-moving lines been reflected in the NRV assessment before period end? Are items grouped for NRV comparison only where individual assessment is genuinely impracticable, rather than as a default practice that masks category-level write-downs?

1. Determine cost using the retail inventory method (or another IAS 2 permitted cost formula) at the department/category level, working back from retail selling price using an appropriate cost-to-retail ratio.
2. At each reporting date, group inventory into categories of similar items (e.g., by season, product line) for NRV comparison, unless items are individually significant.
3. Estimate NRV as the estimated selling price in the ordinary course of business less estimated costs to complete and estimated costs necessary to make the sale (e.g., marketing, commissions, shipping).
4. Compare cost to NRV item-by-item or by category; recognise a write-down for any category where NRV is lower than cost.
5. Recognise the write-down as an expense (increase in cost of sales) in the period it occurs - do not defer it.
6. In subsequent periods, reverse a previous write-down (limited to the amount originally written down) if NRV recovers, recognising the reversal as a reduction in cost of sales.

Inventory is measured at the lower of cost and NRV. Cost under RIM is derived by applying a cost-to-retail percentage (cost of goods available for sale divided by retail value of goods available for sale) to the closing retail value of inventory, adjusted appropriately for markdowns depending on whether the conventional (conservative) or average cost RIM variant is used. NRV must be reassessed at every reporting date using current selling prices and expected selling costs, not historical assumptions. Subsequent measurement requires a fresh comparison each period; a write-down taken in one period is not simply carried forward but must be re-evaluated, and partial or full reversal is required (not optional) if circumstances that caused the write-down no longer exist, capped at the original cost.

Accounting policy note disclosing the cost formula used (e.g., retail method) and how NRV is determined; total carrying amount of inventories by category (e.g., apparel, electronics, FMCG); amount of inventory write-downs recognised as an expense in the period; amount of any reversal of write-downs and the circumstances/events that led to the reversal; carrying amount of inventories carried at NRV (i.e., those written down); inventories pledged as security for liabilities, if any; total inventories recognised as an expense (cost of sales) during the period

• Applying NRV testing only at the total inventory level instead of by category/SKU group, masking write-downs needed on specific slow-moving lines
• using stale or budgeted selling prices instead of actual/expected current selling prices when estimating NRV
• forgetting to deduct estimated costs to sell (e.g., online marketplace fees, delivery) when calculating NRV
• treating markdowns taken for promotional/competitive reasons as automatically equal to the required NRV write-down without checking against actual cost
• failing to reverse a prior write-down when selling prices recover, understating profit
• using the retail method'
• s cost-to-retail ratio incorrectly by including markdown goods in the ratio calculation in a way that distorts the estimated cost (conventional vs average method confusion).