net realizable value
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Net realizable value (NRV) is a measure of a fixed or current
asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
's worth when held in
inventory Inventory (American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of varieties of the English language native to the United States. Currently, American English ...
, in the field of
accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other ob ...
. NRV is part of the
Generally Accepted Accounting Principles Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms oper ...
(GAAP) and
International Financial Reporting Standards International Financial Reporting Standards, commonly called IFRS, are accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus ...
(IFRS) that apply to valuing inventory, so as to not overstate or understate the value of inventory goods. Net realizable value is generally equal to the selling
price A price is the (usually not negative) quantity Quantity is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", "less", or "equal", or b ...

price
of the inventory goods less the selling costs (completion and disposal). Therefore, it is expected sales price less selling costs (e.g. repair and disposal costs). NRV prevents overstating or understating of an assets value. NRV is the price cap when using the Lower of Cost or Market Rule. Under IFRS, companies need to record the cost of their
Ending Inventory Ending inventory is the amount of inventory a company has in stock at the end of its fiscal year. It is closely related with ending inventory cost, which is the amount of money spent to get these goods in stock. It should be calculated at the lowe ...
at the lower of
cost In production Production may be: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of industrial organization, the act of making products (goods and services) * Production ...

cost
and NRV, to ensure that their inventory and
income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''statemen ...
are not overstated (under ASPE, companies record the lower of cost and market value). For example, under IFRS, at a company's year end, if an unfinished good that already cost $25 is expected to sell for $100 to a customer, but it will take an additional $20 to complete and $10 to advertise to the customer, its NRV will be $100-$20-$10=$70. In this year's income statement, since the cost of the good ($25) is less than its NRV ($70), the cost of the good will get recorded as the cost of inventory. In next year's income statement after the good was sold, this company will record a
revenue In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to comp ...
of $100,
Cost of Goods Sold Cost of goods sold (COGS) is the carrying value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortizatio ...
of $25, and Cost of Completion and Disposal of $20+$10=$30. This leads to a
profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic ...
of $100-$25-$30=$45 on this transaction. Suppose we changed the example so that it costs $60 to advertise to the customer. Now the good's NRV will be $100-$20-$60=$20. In this year's income statement, since the NRV ($20) is less than the cost of the good ($25), the NRV will get recorded as the Cost of Ending Inventory. To do so, an inventory write down of $25-$20=$5 is done, and hence a decrease of $5 in this year's income statement. In the next year's income statement after the good was sold, this company will record a revenue of $100, Cost of Goods Sold of $20, and Cost of Completion and Disposal of $20+$60=$80. This leads to the company breaking even on this transaction ($100-$20-$80=$0). Inventory can be valued at either its historical cost or its
market value Market value or OMV (Open Market Valuation) is the price at which an asset would trade in a Market (economics), competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or ''fair market va ...
. Because the market value of an inventory is not always available, NRV is sometimes used as a substitute for this value.


References

{{Reflist United States Generally Accepted Accounting Principles