Net Realizable Value

Inventory is normally recorded at cost. But if the business can no longer sell it for at least what it cost, accounting rules require it to be written down. Net realizable value, often shortened to NRV, is the measure used for this test.

For example, a retailer holds stock that cost 10,000. Because fashions have changed, it now expects to sell it for only 9,000 and to spend 500 on discounts and selling costs. The net realizable value is 8,500, which is below cost, so the inventory is written down by 1,500 and the loss is recorded as an expense.

Inventory might fall below cost because it is damaged, out of date, slow-moving or because market prices have fallen.

Under IFRS, inventory is measured at the lower of cost and net realizable value, and write-downs can be reversed if the value later recovers. US GAAP uses the same test for most inventory but does not allow reversals of write-downs.

Regular reviews of NRV prevent balance sheets from overstating the value of stock and ensure losses are recognised promptly.