Advanced Financial Reporting
NFRS 2 — Share-based Payment
Share-based payment under NFRS 2 — ESOPs, SARs, vesting conditions, measurement and modifications, with worked examples.
Read the note →Nepal Accounting StandardNAS 2Converged with IAS 2ASB Nepal • ICAN
Inventories,
explained properly.
The complete NAS 2 study post — what counts as inventory, what goes into cost, what must be left out, FIFO vs Weighted Average, Net Realisable Value, write-downs & reversals, disclosures, and exam-ready worked examples in Rupees.
The one rule to never forget
Lower of Cost
and NRV
Inventories are measured at the lower of cost and net realisable value — NAS 2, Para 9. Everything else in this standard exists to define those two numbers correctly.
Chapter 01Objective, Scope & What Counts as Inventory
NAS 2 prescribes the accounting treatment for inventories — how much cost to recognise as an asset and carry forward until the related revenue is recognised.
🎯 Objective (Para 1)
To prescribe: (a) amount of cost to recognise as asset, (b) cost formulas to assign cost, (c) write-down to NRV, and (d) recognition as expense including reversal of write-downs.
📦 Applies to ALL inventories, except:
See exclusions on the right. When in doubt, ask: is it held for sale, in production, or to be consumed in production / services?
Inventories include (Para 6 & 8)
- Goods purchased and held for resale — merchandise of a trader, land & property held for resale
- Finished goods produced — ready for sale
- Work in progress (WIP) — in the process of production for sale
- Materials & supplies — to be consumed in production or rendering of services
- Service provider inventories — cost of services for which revenue is not yet recognised (NAS 2 Para 8, 19)
❌ Out of scope — measurement (Para 2-3)
- Financial instruments — NFRS 9
- Biological assets & agricultural produce at point of harvest — NAS 41
❌ Out of scope — entirely
- WIP under construction contracts — NFRS 15
- Inventories of producers of agricultural / forest / mineral products measured at NRV by well-established practice
- Commodity broker-traders measuring at fair value less costs to sell
Exam tip — Nepal: NAS is issued by the Accounting Standards Board (ASB) Nepal and adopted by ICAN. NAS 2 is applicable to entities that apply full NAS (non-NFRS entities / SMEs not in NFRS phase). Entities under NFRS apply NFRS-converged IAS 2 — the measurement rules are substantively the same. Do not mix this file with the separate NFRS 2 (Share-based Payment) notes — that is a completely different standard.
Chapter 02Key Definitions — Para 6
Inventories
Assets: (a) held for sale in ordinary course, (b) in process of production for such sale, or (c) in form of materials/supplies to be consumed in production or services.
Net Realisable Value (NRV)
Estimated selling price in ordinary course less estimated costs of completion less estimated costs necessary to make the sale.
Fair Value
Price that would be received to sell an asset in an orderly transaction between market participants at measurement date (NFRS 13).
NRV ≠ Fair Value. NRV is entity-specific — what this entity expects to realise. Fair value is market-based. Same goods can have different NRV for two entities, but one fair value. This distinction is asked in almost every exam cycle.
Chapter 03The Measurement Principle
MEASUREMENT = LOWER OF COST AND NET REALISABLE VALUE (Para 9)
COST
Rs. 850
Purchase + Conversion + Other
VS
NRV
Rs. 800
Selling price − complete − sell
→ Carry in Statement of Financial Position at Rs. 800 • Write-down of Rs. 50 recognised as expense in the period.
- Comparison is normally item-by-item (Para 29). Grouping similar items is allowed only when they relate to same product line, similar purpose, same geographical area, and cannot practicably be evaluated separately.
- Do not write down raw materials below cost if finished goods are expected to sell at or above cost (Para 32).
- A new assessment of NRV is made in each period. Reversal is allowed — see Chapter 6.
Chapter 04Cost of Inventories — Para 10 to 22
Cost = Costs of Purchase + Costs of Conversion + Other Costs incurred in bringing inventories to their present location and condition.
A. Cost of Purchase Para 11
Purchase price + import duties & non-refundable taxes + transport, handling & other directly attributable costs − trade discounts, rebates & similar items.
Nepal note: VAT that is creditable / refundable is excluded. Customs duty (Bhansar) that is non-refundable is included.
B. Cost of Conversion Para 12–14
Direct labour + systematic allocation of fixed & variable production overheads. Fixed overheads allocated on normal capacity — unallocated overheads are expensed.
C. Other Costs Para 15
Only if incurred in bringing inventories to present location & condition — e.g. design cost for a specific customer, non-production overheads necessarily incurred.
Joint products & by-products (Para 14)
When conversion costs cannot be identified separately (joint products), allocate on a rational & consistent basis — e.g. relative sales value. By-products are measured at NRV and deducted from cost of main product.
Costs EXCLUDED from cost — always expense (Para 16)
- Abnormal amounts of wasted materials, labour or other production costs
- Storage costs, unless necessary in the production process before a further production stage
- Administrative overheads that do not contribute to bringing inventories to present location & condition
- Selling costs
Other special situations
| Situation | Treatment |
|---|---|
| Borrowing costs (Para 17–18, NAS 23) | Include only if inventory is a qualifying asset (takes substantial time to get ready — e.g. maturing whisky, large construction inventory). Routine manufacturing: exclude. |
| Deferred settlement / financing (Para 18) | If purchase has financing element, difference between price for normal credit terms and amount paid = interest expense over credit period, not inventory cost. |
| Service providers (Para 19) | Cost = labour + personnel directly engaged + attributable overheads. Exclude profit margins & non-attributable overheads often built into prices. |
| Agricultural produce harvested (Para 20) | NRV / fair value less costs to sell at harvest (per NAS 41) becomes its cost under NAS 2. |
| Techniques: Standard cost & Retail method (Para 21–22) | Allowed if results approximate actual cost. Retail method: cost = sales value − appropriate gross margin %. Frequently used in retail with many fast-changing items. |
Normal capacity trap: Fixed overhead per unit must NOT increase in low production / idle plant. Example: Fixed overhead Rs. 10,00,000, normal capacity 50,000 units → Rs. 20/unit. If only 40,000 units produced, still Rs. 20/unit in cost; remaining Rs. 2,00,000 is period expense. In abnormally high production, reduce per-unit so inventories are not above cost.
Chapter 05Cost Formulas — Para 23 to 27
Specific Identification
Required for items not ordinarily interchangeable & goods/services for specific projects. Cost of each item identified individually.
FIFO
First-In, First-Out. Oldest costs flow to COGS first. Closing inventory = most recent costs. Permitted.
Weighted Average
Cost of each item = weighted average of costs at beginning + purchases in period. Periodic or perpetual (moving average). Permitted.
LIFO is PROHIBITED under NAS 2 (as under IAS 2). If an exam option or past paper uses LIFO, it is not acceptable for financial reporting in Nepal — even if used for internal / tax calculations elsewhere.
Worked mini-example — Rising prices
Opening: 100 units @ Rs. 10 = Rs. 1,000 • Purchase 1: 100 @ Rs. 12 = Rs. 1,200 • Purchase 2: 100 @ Rs. 15 = Rs. 1,500 • Sold: 150 units
| Method | COGS (150 units) | Closing (150 units) | Effect in rising prices |
|---|---|---|---|
| FIFO | 100×10 + 50×12 = 1,600 | 50×12 + 100×15 = 2,100 | Lower COGS, higher profit, closing at current prices |
| Weighted Avg (3,700 ÷ 300 = 12.33) | 150 × 12.33 = 1,850 | 150 × 12.33 = 1,850 | Smooths price fluctuations |
Same formula must be used for all inventories of similar nature & use. Different formulas justified only for inventories of different nature/use (Para 25–26). A change in formula is a change in accounting policy — NAS 8.
Try it — Quick cost calculator
Rs. 12.33 • COGS Rs. 1,850 • Closing Rs. 1,850
Chapter 06Net Realisable Value in Depth — Para 28 to 33
Inventories are written down when cost may not be recoverable — damaged, obsolete, fully/partially outdated, selling price has declined, or costs to complete/sell have increased.
How to estimate NRV correctly
- Based on most reliable evidence at time of estimate of amount expected to be realised
- Take into account fluctuations after period-end only if they confirm conditions existing at period-end
- Consider purpose for which inventory is held — firm sales contract vs general stock (see below)
- For materials: base on replacement cost may be best available measure of NRV when finished goods will be below cost
| Held under firm contract | Excess / general stock |
|---|---|
| NRV based on contract price for quantity held to satisfy contract | NRV based on general selling prices |
Reversal of write-down (Para 33) — Yes, it is allowed!
If circumstances that caused write-down no longer exist, or NRV increases due to changed economic circumstances, the write-down is reversed — limited to the amount of original write-down, so carrying amount never exceeds original cost. Reversal is recognised as a reduction in inventory expense in the period of reversal.
Year 1: Cost Rs. 850, NRV Rs. 800
Dr Cost of Sales / Write-down expense Rs. 50
Cr Inventories Rs. 50
Dr Cost of Sales / Write-down expense Rs. 50
Cr Inventories Rs. 50
Year 2: NRV recovers to Rs. 870 (cost still 850)
Reversal limited to Rs. 50 → carry at Rs. 850 (not 870)
Dr Inventories Rs. 50
Cr Cost of Sales (reversal) Rs. 50
Decision flow — Should I write down?
Chapter 07Recognition as an Expense — Para 34 to 38
- Carrying amount recognised as expense in period related revenue is recognised (matching)
- Write-down to NRV & inventory losses: expense in period write-down / loss occurs
- Reversal of write-down: reduction of inventory expense in period of reversal
- Inventories allocated to other assets (e.g. used to build PPE): recognised as expense over useful life of that asset
COST OF GOODS SOLD = Opening Inventory + Purchases / Production Cost − Closing Inventory
Amount of inventories recognised as expense is often called cost of sales. Some entities use a format that classifies expenses by nature (raw materials, labour, depreciation) — then disclosure of inventory expense still required.
Chapter 08Disclosure — Para 36 to 39
- Accounting policies adopted, including cost formula used
- Total carrying amount & carrying amounts in classifications appropriate to entity (merchandise, WIP, finished goods, etc.)
- Carrying amount measured at fair value less costs to sell (if applicable)
- Amount of inventories recognised as expense in the period
- Amount of write-down recognised as expense
- Amount of reversal of write-down & circumstances / events that led to reversal
- Carrying amount of inventories pledged as security for liabilities
Information about carrying amounts in different classifications + extent of changes is useful to users. Common classifications: merchandise, production supplies, materials, WIP, finished goods.
Chapter 09NAS 2 in Nepal — Practical Notes
Who applies NAS 2?
Entities applying Nepal Accounting Standards (NAS) issued by ASB Nepal — broadly entities not yet in / not required in the NFRS phase, and SMEs following NAS for SMEs where NAS 13 principles align. Listed companies, banks, large entities under NFRS apply IAS 2 wording — same outcome.
Tax vs Accounting — do not confuse
Income Tax Act 2058 stock valuation rules are for tax computation. NAS 2 governs financial reporting. Differences (e.g. write-down not yet allowed for tax until realised) create deferred tax under NAS 12. Always keep the two separate in exam answers.
- Physical verification: Companies Act 2063 & audit practice in Nepal require stock verification; discrepancies are losses under Para 34.
- Import-heavy traders (Birgunj / Bhairahawa / Kathmandu): Bhansar (customs), transport from border, and clearing charges to bring goods to godown = purchase cost. Godown rent after goods are ready for sale = expense, not cost.
- Seasonal / festival stock (Dashain / Tihar): NRV must reflect post-festival price drop if that confirms condition at year-end (Ashadh end). Obsolete festival stock is a classic NRV write-down case.
Chapter 10Full Worked Example — Himal Traders Ltd., Kathmandu
Manufacturer & trader of stoves. Year ended Ashadh 31, 2082. All figures in Rs.
Step 1 — Calculate Cost
| Item | Rs. | Include? |
|---|---|---|
| Purchase price of materials (net of trade discount) | 8,00,000 | Yes — Para 11 |
| Customs duty (non-refundable) + transport to factory | 70,000 | Yes |
| Creditable VAT paid on purchases | 1,04,000 | No — recoverable |
| Direct labour | 2,50,000 | Yes — conversion |
| Variable production overhead | 90,000 | Yes |
| Fixed production overhead (normal capacity) | 1,20,000 | Yes — allocated |
| Abnormal wastage | 30,000 | No — expense |
| Selling & admin overhead | 80,000 | No — expense |
| Total cost of finished goods produced | 13,30,000 |
Step 2 — NRV test on closing stock
Closing finished goods: cost Rs. 2,66,000 (200 units @ Rs. 1,330). Expected selling price Rs. 1,250/unit, cost to sell Rs. 40/unit. NRV per unit = 1,250 − 40 = Rs. 1,210. NRV total = 200 × 1,210 = Rs. 2,42,000.
Write-down = 2,66,000 − 2,42,000 = Rs. 24,000
Dr Cost of Sales Rs. 24,000
Cr Inventories (allowance / direct) Rs. 24,000
Carrying amount in SOFP = Rs. 2,42,000 (lower of cost & NRV)
Dr Cost of Sales Rs. 24,000
Cr Inventories (allowance / direct) Rs. 24,000
Carrying amount in SOFP = Rs. 2,42,000 (lower of cost & NRV)
Step 3 — Next year reversal
Next year selling price recovers to Rs. 1,400/unit. NRV now exceeds cost. Reverse full Rs. 24,000 (limited to original write-down). Carrying amount returns to cost Rs. 2,66,000 — never above cost.
Chapter 11NAS 2 vs IAS 2 vs Old Practice
| Point | NAS 2 / IAS 2 | Common old / wrong practice |
|---|---|---|
| Measurement | Lower of cost & NRV | Only at cost, ignoring NRV ↓ |
| LIFO | Prohibited | Sometimes used in textbooks |
| Fixed overhead | Normal capacity basis | Actual production (inflates unit cost in low output) |
| Write-down reversal | Allowed, capped at original write-down | Often assumed never reversible |
| Borrowing costs | Only for qualifying assets (NAS 23) | All interest capitalised |
NAS 2 is substantially converged with IAS 2 Inventories. There is no separate “NFRS 2 Inventories” — NFRS 2 is Share-based Payment. Inventories under NFRS regime = IAS 2 as adopted in Nepal. That is why your two files are: (1) this NAS 2 file, and (2) a separate NFRS 2 Share-based Payment file.
Chapter 1210 Exam Traps & Rapid Revision
- Including creditable VAT in cost
- Capitalising selling / admin costs
- Using LIFO
- Allocating fixed overhead on actual (low) output
- Writing down materials when finished goods will sell above cost
- Reversing write-down above original cost
- Grouping dissimilar items for NRV test to hide losses
- Including abnormal wastage in cost
- Confusing NRV with fair value
- Forgetting disclosure of pledged stock
FAQ: Can I use standard cost?
Yes, if it approximates actual cost (Para 21). Regularly review and revise standards in light of current conditions.
FAQ: Is reversal of write-down really allowed? It feels like writing up.
Yes — Para 33 requires it when NRV recovers, but never above original cost. It is not a revaluation; it restores cost.
FAQ: Goods in transit / consignment?
Include if risks & rewards / control have passed to you (goods in transit purchased). Exclude goods held on consignment for others — they are not your inventory. Include your goods sent on consignment — still your inventory until sold by consignee.
Chapter 13Self-Test — 6 Questions
Tap an answer to check instantly. Aim for 6/6 before the exam.
Final revision checklist
- I can state Para 9 in one line and define NRV vs Fair Value
- I can list all included & excluded costs without looking
- I can allocate fixed overhead on normal capacity
- I can compute FIFO & WAC and explain profit effect in rising prices
- I can do a write-down + reversal journal with the cap
- I can write all 7 disclosure items from Para 36