Net Realisable Value (NRV)

What Is Net Realisable Value (NRV)?

Inventory is one of the few assets whose carrying value is capped by what it will fetch rather than by what it cost, and the rule exists because goods can lose their market while remaining physically intact. Measurement rests on the goods as they actually stand at the reporting date, supported by evidence of what the relevant market will pay rather than a policy percentage applied for convenience.

Two features of the calculation are frequently missed. The costs to sell are deducted, so a realisable value equal to cost still produces a write-down once transport, handling and any commission to the clearance channel are taken into account. And the assessment is made item by item rather than across the inventory as a whole, except where items in the same product line have similar purposes and can reasonably be grouped, which prevents a profitable line from concealing a loss-making one. Where a write-down is later reversed because the market has recovered, the reversal is limited to what was originally written down.

Net Realisable Value (NRV) Under Indian Law

Position: measurement is capped by realisation. Inventories are stated at whichever is less, what they cost or what they will bring in. That second figure is the price expected on a normal sale, reduced by whatever remains to be spent finishing the goods and getting them sold.

• The comparison is ordinarily made item by item, though items inside a single range doing much the same job may be grouped where that is defensible.
• Source: paragraph 5 of Accounting Standard 2 for entities applying the Accounting Standards, and paragraph 9 of Ind AS 2 for those applying Indian Accounting Standards.
• Note: the estimate is made against the condition the goods are actually in at the reporting date. A blanket percentage, applied without support for the price the goods will actually command, does not meet the basis.

How Net Realisable Value (NRV) Is Measured and Valued

The basis is expected selling price, less costs of completion, less costs necessary to make the sale.

• Take a finished line held at a cost of 400 per unit. The clearance channel that will take it is currently paying 360. Transport to that channel runs at 15 per unit and the channel's commission at 25.
• Selling price 360, less completion nil since the goods are finished, less selling costs of 40, gives a realisable figure of 320.
• Against a cost of 400 that is a shortfall of 80 per unit, and the carrying amount comes down to 320 with 80 taken to the profit and loss account in the period the fall occurred.
• Every input is named and evidenced: the 360 from prices actually achieved on comparable goods, the 15 from the freight rate, the 25 from the channel agreement. A percentage applied by policy evidences none of them.

How Net Realisable Value (NRV) Works in Practice

1. Inventory is grouped for assessment. The unit is the individual item, unless several lines within one range do much the same job and grouping them is defensible.

1. For each unit the price the goods should fetch through normal trading is fixed from evidence: prices recently achieved, offers held, or a documented assessment where no market transaction exists.

1. Costs still to be incurred are deducted. Where the goods need finishing, the cost of completion comes off; so does everything necessary to make the sale, including transport, handling and any channel margin.

1. The resulting figure is compared with cost, and the lower of the two becomes the carrying amount. Any reduction is charged as an expense in the period the value fell.

1. At a later reporting date the assessment is repeated. Where circumstances have reversed, the earlier write-down is reversed, but only up to the amount originally written down.

Net Realisable Value (NRV): A Worked Example

A Baddi appliance maker holds 1,200 units of a superseded model. The selling price still sits above cost, which is why the position looks safe until the deductions are made.

The two subtractions decide the answer. Rework and selling costs of Rs 600 a unit pull the realisable figure below the Rs 4,800 cost, so a Rs 3.60 lakh write-down is required even though the goods will sell at a headline profit. Selling price on its own is not the test. The comparison is cost against price minus whatever must yet be spent to finish the goods and move them, and it is made line by line rather than across the whole category, because a profitable line cannot be used to absorb a loss-making one.

Common Mistakes With Net Realisable Value (NRV)

The measurement is straightforward and the application is where it goes wrong.

• Forgetting to deduct the costs of selling, so goods expected to fetch exactly what they cost are treated as needing no reduction, before transport, handling and channel margin come off.
• Assessing across the whole inventory rather than item by item, which lets a profitable line conceal a loss-making one.
• Using a policy percentage instead of evidence of what the goods will fetch, when prior realisations and offers received are available and objective.
• Estimating on the goods as they were rather than as they actually are, ignoring damage, ageing or a broken assortment.
• Reversing a previous write-down beyond the amount originally written down, which pushes the carrying value above original cost and is not permitted.

Related Stock Audit Terms

The category that most often needs this test applied is the slow-moving one, so slow-moving and obsolete stock (slob) is the entry to read next. Every other term in this cluster is listed in the A-Z of stock audit terms, grouped by the part of the work it belongs to.