Net Realizable Value
Net realizable value (NRV) is the amount by which the estimated selling price of an asset exceeds the sum of any additional costs expected to be incurred on the sale of the asset. NRV may be calculated for any class of assets but it has significant importance in the valuation of inventory. Both GAAP and IFRS require us to consider the net realizable value of inventory for valuation purposes. Under GAAP, inventories are measured at lower of cost or market provided that the market value must not exceed the NRV of inventory. Under IFRS, inventories must be valued at lower of cost and NRV.
Formula
Net Realizable Value = Sale Value – Cost to Make Sale
Where,
Sale value is the estimated selling price of inventory in the ordinary course of business; and
Cost to make sale is the sum of any additional costs expected to be incurred to make the sale including, but not limited to, the costs of finishing, repair, advertising expenses directly related to inventory and transportation costs borne by the owner etc. if any.
Example
Calculate the net realizable value of inventory having following particulars:
| Total Units | 19,000 |
| Estimated Selling Price per Unit | 35 |
| Units Damaged (Included in Total Units | 700 |
| Cost to Repair each Damaged Unit | $6 |
| Other Selling Costs per Unit | $2 |
Solution
| Good | Damaged | |
|---|---|---|
| Estimated Price per Unit | $35 | $35 |
| – Repair Cost | 6 | |
| – Other Selling Costs | 2 | 2 |
| NRV per Unit | $33 | $27 |
| × Units | 18,300 | 700 |
| Net Realizable Value | $603,900 | $18,900 |
| Total Net Realizable Value | $622,800 | |
by Irfanullah Jan, ACCA and last modified on