As finance professionals, we are trained to measure and report economic reality. When economic reality is being reshaped by a geopolitical shock, as it is today, the accounting implications are not merely technical. They are material, judgment-intensive, and, in many cases, need to be addressed before the year-end or quarter-end close, not during it.
The Gulf conflict of 2026 and the resulting disruption to LNG supplies, shipping routes, and commodity prices have created specific accounting challenges for companies in the Chemicals & Fertilisers sector. I have outlined below the most critical issues, followed by a summary of additional aspects that finance teams and auditors should include on their checklist.
1. Inventory Valuation Under Ind AS 2: NRV vs Elevated Cost
The spike in LNG and natural gas prices has significantly inflated production costs within a short period. This creates an immediate challenge under Ind AS 2 (Inventories), which requires inventories to be carried at the lower of cost and Net Realisable Value (NRV).
For urea and DAP (Diammonium Phosphate), where selling prices are governed by government-notified MRP under the Urea Control Order, and the Nutrient-Based Subsidy (NBS) framework, NRV may be lower than the current elevated cost of production, requiring a write-down. This assessment must be done product-by-product or, at a minimum, by product category. A portfolio-level NRV assessment that masks individual product losses will not hold up to scrutiny.
For speciality chemicals with market-linked prices, the assessment turns on whether elevated feedstock costs can be passed through to buyers, a determination that varies significantly by product and customer contract type. Finance teams should document the NRV calculation for each major product line, supported by current market price evidence and estimated selling costs as of the balance sheet date.
One important nuance: raw material inventories purchased at pre-disruption prices cost less than their current replacement value. Ind AS 2 does not permit writing these up to replacement cost; the standard floor is cost, not current market. This asymmetry means that on the same balance sheet, finished goods may be written down while raw materials remain at historical cost, even when the combined economics of the inventory cycle are under stress. Shall we clarify that valuation write down is on finished goods, raw materials are written down only if the ultimate price of finished goods has declined significantly.
2. Subsidy Receivable Recognition Under Ind AS 20
For fertiliser manufacturers, the gap between production costs and the government-controlled MRP is bridged by a production-linked subsidy. With LNG costs having surged, this gap has widened materially. The accounting question is two-fold.
On recognition: Ind AS 20 (Accounting for Government Grants) requires that grants be recognised only when there is reasonable assurance that the conditions attached will be complied with and that the grant will be received. In the current environment, with government budgets stretched across multiple emergency interventions, cooking gas subsidies, petroleum pricing support, and food security measures, the assessment of reasonable assurance for fertiliser subsidy receivables needs to be revisited, particularly for amounts relating to production during supply-constrained months, where compliance with standard output norms may not have been achieved.
On measurement: Subsidy rates are periodically announced by the Department of Fertilisers, and historically there has been a lag between cost escalation and subsidy revisions. The difference between the announced subsidy rate and the actual cost gap may represent an unrecoverable exposure. Finance teams should carefully consider the basis of recognition of this differential as a receivable as per principle of certainty of revenue under Ind AS till notification by government supporting the higher rate.
3. Onerous Contracts Under Ind AS 37
Several chemical companies will have entered into fixed-price supply contracts, domestic or export, at margins that assumed normal feedstock pricing. With LNG costs surging and production rationed, many of these contracts may now be onerous under Ind AS 37: the unavoidable costs of fulfilling the contract exceed the economic benefits expected from it.
Ind AS 37 (Provisions, Contingent Liabilities and Contingent Assets) requires a provision to be recognised for an onerous contract as soon as it becomes onerous, measured at the lower of: (a) the cost of fulfilling it, and (b) the penalties or compensation payable on termination. The standard does not permit deferring this recognition until completion or cancellation.
The practical steps are: identify all fixed-price contracts with outstanding delivery obligations; reprice the remaining deliverable quantities at current production cost; compute the shortfall against contract revenue; and determine whether a provision is required. For export contracts where delivery timelines are being extended due to Cape of Good Hope rerouting, the cost of the extended shipment period (additional freight, insurance, demurrage) should also be factored into the fulfilment cost calculation.
Other Aspects to Consider
In addition to the four issues above, finance teams and auditors in this sector should also address the following on their year-end checklist:
• Take-or-Pay LNG Contracts: Provision vs Contingent Liability Large gas consumers often have Take-or-Pay (ToP) LNG contracts, obligating payment for a minimum volume regardless of delivery. The Hormuz closure affects supply, requiring careful accounting. The accounting depends on whether the force majeure clause covers this event and if the supplier has invoked it. Auditors need to see current legal advice, not post-hoc rationalisation.
• Revenue cut-off for export shipments (Ind AS 115): For goods dispatched near the year-end and now rerouted via Cape of Good Hope, or stranded awaiting insurance cover, revenue recognition depends on INCO terms (FOB vs CIF) and whether transfer of control has occurred as of the balance sheet date. Where war-risk insurance has been declined by underwriters, transfer of risk may not have passed to the buyer regardless of the contractual shipping terms, and recognition should be deferred.
• Hedge accounting effectiveness (Ind AS 109): Companies with LNG, crude derivative, or forex hedging programmes need to reassess hedge effectiveness as of the balance sheet date. Where the hedged item no longer exists in its original form (e.g., production curtailed, supply contract disrupted), the hedge relationship must be discontinued and accumulated OCI balances reclassified to P&L. This could be a material item.
• Going concern assessment (SA 570): For gas-intensive manufacturers with significant production curtailment and elevated debt, the going concern assessment cannot be routine this year. Management's 12-month cash flow projections must reflect reduced volumes, elevated feedstock costs, working capital stress from delays in subsidy receivables, and realistic assumptions about when gas supply normalises. Where material uncertainty exists, disclosures must be clear and quantified, not boilerplate.
• FEMA and import payment compliance: With extended voyage timelines, import payment due dates under Letters of Credit may breach the standard 180-day realisation window. Advance import payments where goods are delayed beyond six months need review for FEMA compliance and appropriate provisioning treatment.
In case the conflict is not resolved till the date of declaration of results for the year ended 31 March, 2026, companies would need to evaluate suitable disclosures in the results disseminated under SEBI LODR.
Closing Observation
The financial close for chemicals and fertilizer companies for FY 2025-26 will require greater judgment, detailed documentation, and higher engagement between management and auditors than a typical year. Almost every major estimate, including inventory NRV, subsidy receivable, contract provisions, and hedge effectiveness, is directly affected by a geo-political events that are unfolding at the time of reporting.
The instinct to wait for clarity before making accounting decisions is understandable, but the standards do not permit it. Ind AS requires recognition and measurement with the information available as of the balance sheet date. Early identification, contemporaneous documentation, and proactive provisioning will serve the quality of financial reporting.
These are complex issues, and I imagine practitioners across the sector are navigating similar questions. I would welcome the opportunity to compare notes and hear how peers are approaching these positions.
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