Net realizable value (NRV) is a method of evaluating an
asset's worth when held in
inventory, in the field of
accounting. NRV is part of the
Generally Accepted Accounting Principles and
International Financial Reporting Standards (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 of the inventory goods less the selling costs (completion and disposal).It is expected sales price less selling costs (e.g. repair and disposal costs).In formula:
Under IFRS, companies need to record the cost of their
Ending Inventory at the lower of cost and NRV, to ensure that their inventory and
income statement 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 of $100,
Cost of Goods Sold of $25, and Cost of Completion and Disposal of $20+$10=$30. This leads to a
profit of $100-$25-$30=$45 on this transaction.