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IAS 2 requires that those assets that are considered inventory should be recorded at the lower of cost or net realisable value. Cost not only includes the purchase cost but also the conversion costs, which are the costs involved in bringing inventory to its present condition and location, such as direct labour.
the asset is still held at the end of year 1, when its market value is $120; the company sells the asset in year 2 for $115; At the end year 1 the asset is recorded in the balance sheet at cost of $100. No account is taken of the increase in value from $100 to $120 in year 1. In year 2 the company records a sale of $115.
Net realizable value (NRV) is a measure of a fixed or current [1] asset's worth when held in inventory, in the field of accounting.NRV is part of the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) that apply to valuing inventory, so as to not overstate or understate the value of inventory goods.
The goods may become obsolete. The market value of the goods may simply decline due to economic factors. Where the market value of goods has declined for whatever reasons, the business may choose to value its inventory at the lower of cost or market value, also known as net realizable value. [14]
Certain items must be disclosed separately in the notes (or the statement of comprehensive income), if material, including: [5] (IAS 1.98) Write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs
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