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Inventory revaluation reserve treatment

Saji (student) (30 Points)

20 July 2013

Dear Sir/Mam,

I have reavaluated my inventory due to the change in Cost price and there is a Revaluation reserve generated. I have kept this in the Balance Sheet under Reserves & Surplus. Now i need your advice in the subsequent adjustment of the reserve. How Do I do that? Should i need to set off this from the Retained earnings or need to charge to P&L. Please let me know, What accounting policy states about this?

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6 Replies

SAURABH NENE (Chartered Accountant) (226 Points)
Replied 20 July 2013

All adjustments in the value of inventory shall be adjusted to P& L only. There is no reserve called Inventory revaluation reserve. adjust it to P& L and nullify the reserve.

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CA Kumar Mukesh (CA CMA FINAL and Advance Excel Trainer) (6881 Points)
Replied 20 July 2013

As per para 9 of AS-2 inventory, inventory should be valued as cost or Net reliazable value which ever is less.

The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Net realisable value - The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. The cost of inventories may also not be recoverable if the estimated costs of completion or the estimated costs to be incurred to make the sale have increased. The practice of writing inventories down below cost to net realisable value is consistent with the view that assets should not be carried in excess of amounts expected to be realised from their sale or use.

Estimates 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.

Recognition as an expense-When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories shall be recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

Saji (student) (30 Points)
Replied 20 July 2013

Thanks for writing but still the answers are seems to be lame. I can't simply charge the cost difference to P&L when it's 100,000 USD, that will result in drastic difference in the profitability. So i need to spread this difference into certain periods. So how do i adjust this? Written off against the retained earning or in subsequent month's profit. Kindly state what accounting policy says about the treatment.

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Jignesh (Student CA Final ) (40 Points)
Replied 17 June 2016

I agree with reply of CA Saurabh Nene

Saliq Ansari (CA_Final Student) (885 Points)
Replied 17 June 2016

As per AS 2,

Inventories are to be valued at lower of Cost or Net Realisable value,

This states that the value of inventory could be lower if the NRV is less than Cost but the value of inventory cannot be higher than cost in any circumstances,

in your case you have valued the inventory at more than the cost and created the reserve which is not in line with the AS-2, the above treatement should be reversed,

No need to charge to P&L, just cancel the reserve and revalue the inventory at its original.

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mohit singh (2 Points)
Replied 31 May 2019

just want to know entry for revaluation of inventory.

closing stock come in balance sheet and also in profit and loss account ( income side). if we change value of entry ... automatically profit and loss will get hit. but what will be entry ???