Net Realizable Value (NRV)

What Is Net Realizable Value (NRV)?

Net realizable value (NRV) is a valuation method, common in inventory accounting, that considers the total amount of money an asset could create upon its sale, less a reasonable estimate of the costs, fees, and taxes associated with that sale or disposal.

Grasping Net Realizable Value (NRV)

NRV is a common method used to assess an asset's value for inventory accounting. Two of the largest assets that a company might list on a balance sheet are accounts receivable and inventory. NRV is utilized to value both of these asset types. NRV is a valuation method utilized in both generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS).

GAAP expects that certified public accountants (CPAs) apply the principle of conservatism to their accounting work. Numerous business transactions take into consideration judgment or watchfulness while picking an accounting method. The principle of conservatism expects accountants to pick the more conservative approach to all transactions. This means that the accountant ought to utilize the accounting method that produces less profit and doesn't exaggerate the value of assets.

NRV is a conservative method for esteeming assets since it estimates the true amount the seller would receive net of costs on the off chance that the asset were to be sold.

The accompanying advances ought to be taken to ascertain NRV:

• Determine the expected selling price of an asset
• Determine every one of the costs associated with the possible sale of the asset
• Compute the difference between the expected selling price of an asset and the costs associate with its sale

The formula for determining net realizable value (NRV) is:

NRV = Expected selling price - Total production and selling costs

Instances of Uses for Net Realizable Value

Accounts Receivable

An accounts receivable balance is changed over into cash when customers pay their outstanding solicitations, yet the balance must be adjusted down for clients who don't make payments. NRV for accounts receivable is calculated as the full receivable balance less a allowance for doubtful accounts, which is the dollar amount of solicitations that the company estimates to be terrible debt.

Inventory

GAAP rules previously required accountants to utilize the lower of cost or market (LCM) method to value inventory on the balance sheet. Assuming the market price of inventory fell below the historical cost, the principle of conservatism required accountants to utilize the market price to value inventory. Market price was defined as the lower of either replacement cost or NRV.

The Financial Accounting Standards Board (FASB), the independent organization that lays out GAAP standards, issued an update in 2015 to its code that changed the inventory accounting requirements for companies, gave they don't utilize last-in-first-out (LIFO) or retail methods. Companies must now utilize the lower cost or NRV method, which is more predictable with IFRS rules. Fundamentally, the term "market" has been supplanted with "net realizable value."

At the point when a company purchases inventory, it might cause extra costs to store or prepare the goods available to be purchased. The costs associated with putting away inventory are alluded to as the carrying cost of inventory. Expect, for instance, a retailer purchases large parts of costly furniture as inventory, and the company needs to build a display case and hire a contractor to carefully move the furniture to the purchaser's home. These extra costs are deducted from the selling price to compute the NRV.

Cost Accounting

Cost accounting is a heuristic method utilized by certain organizations to account inside for costs associated with different business activities.

NRV is utilized to account for such costs when two products are created together in a joint costing system until the products arrive at a split-off point. Every product is then delivered separately after the split-off point, and NRV is utilized to allot previous joint costs to every one of the products. This permits managers to compute the total cost and assign a sale price to every product independently.

Highlights

• Net realizable value (NRV) accounts for the value of an asset in terms of the amount it would receive upon sale, minus selling costs.
• It is a common method used to assess accounts receivable and inventory, and is likewise utilized in cost accounting.
• NRV is a conservative method utilized by accountants to guarantee the value of an asset isn't exaggerated.

FAQ

How to Calculate Net Realizable Value?

Net realizable value (NRV) is a common method used to assess an asset's value for inventory accounting. It is found by determining the expected selling price of an asset and every one of the costs associated with the possible sale of the asset, and afterward computing the difference between these two. To put it in formulaic terms, NRV = Expected selling price - Total production and selling costs.

What Is Accounting Conservatism?

Accounting conservatism is a principle that requires company accounts to be prepared with wariness and high degrees of verification. These bookkeeping rules must be kept before a company can make a legal claim to any profit. The overall concept is to factor in the most dire outcome imaginable of a company's financial future. Unsure liabilities are to be recognized when they are found. Interestingly, incomes must be recorded when they are guaranteed of being received.

What Are Some Examples of NRV Usage?

NRV for accounts receivable is calculated as the full receivable balance less an allowance for doubtful accounts, which is the dollar amount of solicitations that the company estimates to be terrible debt. NRV is likewise used to account for costs when two products are delivered together in a joint costing system until the products arrive at a split-off point. Every product is then delivered separately after the split-off point, and NRV is utilized to dispense previous joint costs to every one of the products. GAAP rules previously required accountants to utilize the lower of cost or market (LCM) method to value inventory on the balance sheet. This was refreshed in 2015 to where companies must now utilize the lower of cost or NRV method, which is more predictable with IFRS rules. Fundamentally, the term "market" has been supplanted with "net realizable value."