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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.
This method allows declines in inventory value to be offset against income of the period. When goods are damaged or obsolete, and can only be sold for below purchase prices, they should be recorded at net realizable value. The net realizable value is the estimated selling price less any expense incurred to dispose of the good.
Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This FASB update makes usage consistent with the IFRS wording and removes the use of "or" in a context where "and" was always the correct one. [ 4 ]
The net realizable value normally indicates the average value of an item in the marketplace. Often this cost is interchangeable with replacement cost. References
Under IFRS, an asset is considered to be impaired (and is thus written down) if its carrying amount is greater than its recoverable amount. The recoverable amount is the greater of the asset's value in use (present value of future values) or net realizable value.
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 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]
It is standard under the historical cost basis to report the cost of inventory (stock) at the lower of cost and net realisable value. [2] As a result:- A decrease in the realisable value of inventory to an amount below its historical cost is recognised immediately [3]