net realizable value

Содержание
  1. Lower of Cost and Net Realisable
  2. 1 Reasons for lower NRV
  3. Example – Lower of cost and NRV
  4. 2 Applying Lower of Cost and NRV Rule
  5. Example – Applying LCNRV Rule
  6. 3 Accounting for Lower of Cost and NRV (LCNRV)
  7. 3.1 Recording loss directly in inventory account
  8. 3.1.1 Recording LCNRV loss as cost of goods sold and directly in inventory
  9. 3.1.2 Recording LCNRV loss as separate account and directly in inventory
  10. Example – Accounting for LCNRV loss – directly in inventory
  11. 3.2 Recording loss in contra-asset account (Allowance account)
  12. 3.2.1 Recording LCNRV loss as cost of goods sold and contra-asset account
  13. 3.2.2 Recording LCNRV loss as separate account and contra-asset account
  14. Example – Accounting for LCNRV loss – Allowance for LCNRV loss
  15. 4 Recovery of LCNRV loss
  16. Example – Recovery of LCNRV Loss
  17. Экономический словарь — значение слова Net Realizable Value (nrv) (чистая Цена Реализации)
  18. Смотреть значение Net Realizable Value (nrv) (чистая Цена Реализации) в других словарях
  19. Посмотреть в Wikipedia статью для Net Realizable Value (nrv) (чистая Цена Реализации)
  20. Net Realizable Value (Definition, Examples) | How it Works?
  21. Net Realizable Value Example
  22. Net Realizable Value in Inventory Valuation
  23. Net Realizable Value of  Accounts Receivables
  24. Conclusion
  25. Recommended Articles
  26. Net Realizable Value — Definition, How to Calculate, Example
  27. NRV and Lower Cost or Market Method
  28. How to Calculate the NRV
  29. Example of Calculating the NRV
  30. Related Readings
  31. Net Realizable Value Formula | Calculator (Excel Template)
  32. Net Realizable Value Formula
  33. Examples of Net Realizable Value Formula (With Excel Template)
  34. Net Realizable Value Formula – Example #1
  35. Net Realizable Value Formula – Example #2
  36. Explanation
  37. Relevance and Uses of Net Realizable Value Formula
  38. Net Realizable Value Formula Calculator

Lower of Cost and Net Realisable

net realizable value

many other assets, inventory is recorded and reported at cost in accounting books following historical cost principle following a certain cost flow assumption either FIFO, LIFO, AVCO or other methods. Another way of measuring inventory value is  net realizable value (NRV).

Under normal circumstances, cost of inventory is always lesser than the net amount business can earn by selling the inventory, called net realizable value (NRV).

Common sense dictates that cost has to be lesser than NRV to make profit.

But following a concept of conservatism, even if NRV is higher than cost, value of inventory is kept at cost and gain is not recognized until the inventory actually sells.

However, if NRV of inventory falls below the cost of inventory, following the same concept of conservatism, entity must write down the value of inventory to the amount that can be realized.

Hence the recognition of loss to the extent expenditure on inventory are not expected to be recovered. It does not make sense to report an asset at any value higher than the amount it can recover and may overstate the assets materially.

Therefore, entity must switch to NRV basis from historical cost basis of measurement if recoverable amount falls below cost of asset.

1 Reasons for lower NRV

NRV may falls below cost for two main reasons; either cost has increased or sales price has dropped. Some of the examples include:

  1. Goods are now obsolete. With newer products in the market offered at competitive rates, entity is unable to make sales or at least at profitable rate.
  2. Goods are damaged. Though price is good, but the cost to repair the goods renders recoverable or realisable amount lesser than the cost itself.
  3. Seasonal effects can alter prices significantly, though can be temporary.
  4. Wrong sales strategy of entity may cause oversaturation of goods in the market. This can cause prices to plummet below original cost. Entity has to maintain appropriate levels of supply against demand.
  5. If entity is minting profits, sooner or later competitors in the market will jump in as well offering similar products and it may be the case that they start offering products with same utility at prices lower than the production cost of entity.
  6. Production cost has increased. May be because of increase in raw material cost or other direct expenses such as royalty that is paid in foreign currency and exchange rate has fluctuated unfavorably for entity.
  7. It might be possible that entity can produce units at lower cost but has to spend a lot of carriage cost to move inventory to market before it can be sold.

Example – Lower of cost and NRV

By the end of the year entity had 100 units in warehouse of X-Pro. Units are so far reported at total cost of 10,000.

Recently fire broke out and damaged the outer casing of units. Engineers have confirmed that product can still fetch full selling price if outer cover is replaced. Currently X-Pro is selling for $110 per unit and cost of repair is estimated to be $5 per unit. Additionally entity will have to pay $2,000 in total towards the carriage cost to move repaired goods from workshop to warehouse.

Compute the value at which inventory should be reported in financial statements if LCNRV rule is followed?

Solution:

Total cost of units10,000
Total sales price [100 x 110]11,000
Less:Repair cost [100 x 5] Carriage cost500 2000(2,500)8,500

NRV (8,500) < Cost (10,000) therefore, inventory will be valued at 8,500.

2 Applying Lower of Cost and NRV Rule

Application of LCNRV rule can be done individual item basis, group basis or on overall basis. What basis entity must use depends on the nature of inventory itself and management’s policy.

For example if product can be sold individually and its selling price and related costs and can be determined independently then for this product LCNRV rule will be applied on individual basis.

If product is of such nature that its NRV cannot be determined on individual basis as it has to be sold with other products as a package then rule will be applied on group basis.

And if entity manages inventory as a whole then rule will be applied on totality basis on all types of inventory taken together.

However, there is no restriction to apply LCNRV rule on different basis only if nature of product and sales is different. Entity may group similar types of products together and apply the rule on group basis even if items can be sold individually.

Example – Applying LCNRV Rule

Consider the following data. If entity applies LCNRV on individual basis then inventory value will be determined as follows:

[table id=27 /]

For the same set of data if entity applies LCNRV rule on group basis then inventory valuation will be as follows:

[table id=28 /]

And lastly if entity applied LCNRV rule inventory wide then measurement will be total cost and total NRV and then whichever, is lower will be used to value total inventory held:

[table id=29 /]

3 Accounting for Lower of Cost and NRV (LCNRV)

To account for the the loss if NRV is lesser than the original cost, entity may choose one of the ways:

  1. Make adjustment in the inventory account directly to record the loss
  2. Make contra-asset account to record the loss

Jurisdiction and the applicable standards may also dictate the approach entity has to apply in this situation. For example International Accounting Standard (IAS) 2 requires loss to be adjusted directly in the inventory account.

3.1 Recording loss directly in inventory account

If entity choose to record written-down loss directly in inventory account then it has to be credited. However, which account is to be debited depends on the presentation of expenses in income statement and entity’s policy to record such losses. Entity may choose either of the following options:

  1. Report the loss as cost of sales/cost of goods sold
  2. Report the loss separately

3.1.1 Recording LCNRV loss as cost of goods sold and directly in inventory

Under this method once the loss is determined, cost of goods sold account is debited and inventory account is credited to record the write-down loss on inventory.

3.1.2 Recording LCNRV loss as separate account and directly in inventory

Under this method instead of debiting the loss to cost of goods sold, a separate account with appropriate name is debited and then closed in profit and loss. Credit aspect is however, recorded in same inventory account.

Example – Accounting for LCNRV loss – directly in inventory

Ultar Inc. makes miniature models of Karakoram peaks for tourists. Cost of year-end inventory is 7,388. However, recent sales in southern market has seen fall in prices. Therefore, its NRV of inventory is 5,300 only.

Give the journal entry to record the write-down loss if entity is using:

  1. cost of sales method
  2. Separate account method

Solution:

1 cost of sales method:

Write-down loss is: 5300 – 7388 = -2088. The journal entry will be as following:

Cost of goods sold a/c2088
Inventory a/c2088

2 Separate account method:

In this method a separate account with appropriate title e.g. “Inventory written-down loss” will be used to record the loss which is later closed in profit and loss as follows:

Inventory written-down loss a/c2088
Inventory a/c2088

Closing entry will be:

Profit and loss a/c2088
Inventory written-down loss a/c2088

3.2 Recording loss in contra-asset account (Allowance account)

In the above method, we saw that recording LCNRV loss inventory account is credited or in simple words reduced to reflect NRV.

However, in some jurisdictions it is preferred that instead of altering inventory account, loss is recorded in separate contra-asset account. This way the original inventory value is kept in records and also lower of cost and NRV rule is achieved because inventory value is reported as a net of inventory account and contra-asset account in the financial statements.

On the other hand, its up to entity whether it s to record loss as part of cost of sales or separately in the income statement. So even in this approach its up to entity which account to debit.

3.2.1 Recording LCNRV loss as cost of goods sold and contra-asset account

Under this method once the loss is determined, cost of goods sold account is debited and Allowance for NRV loss account is credited to record the write-down loss on inventory.

3.2.2 Recording LCNRV loss as separate account and contra-asset account

Under this method instead of debiting the loss to cost of goods sold, a separate account with appropriate title is debited and then closed in profit and loss. Credit aspect is however, recorded in contra-asset account with appropriate name e.g. Allowance for NRV loss account.

Example – Accounting for LCNRV loss – Allowance for LCNRV loss

Ultar Inc. makes miniature models of Karakoram peaks for tourists. Cost of year-end inventory is 7,388. However, recent sales in southern market has seen fall in prices. Therefore, its NRV of inventory is 5,300 only.

Give the journal entry to record the write-down loss if entity is using:

  1. cost of sales method
  2. Separate account method

Solution:

1 Cost of sales method

Cost of goods sold a/c2088
Allowance for NRV loss a/c2088

2 Separate account method

Inventory written-down loss a/c2088
Allowance for NRV loss a/c2088

Closing entry will be:

Profit and loss a/c2088
Inventory written-down loss a/c2088

4 Recovery of LCNRV loss

Though prices of inventory hardly rise again once fallen, however, in some cases inventory’s NRV may recover and rise. In such cases, entity is permitted to reverse the previously recognized loss.

The accounting treatment for such reversals again depends upon applicable rules, standards and the manner in which loss was recognized previously. In case of IFRSs, entity is required to reduce the amount of inventory recognized as expense on to account for reversal in NRV loss.

And in other cases where allowance is used, then allowance is adjusted. However, one thing is common i.e. value of inventory cannot be more than the original cost of inventory. In other words, amount of reversal cannot be higher than original write-down loss.

Example – Recovery of LCNRV Loss

Ultar Inc. makes miniature models of Karakoram peaks for tourists. Cost of year-end inventory is 7,388. Last year, sales in southern market were not promising thus entity had to write down the inventory to then prevailing NRV of 5,300.

This year however, NRV has risen and determined at 8,500.

Give the journal entry to record the recovery of write-down loss.

Solution:

Although NRV has risen from 5,300 to 8,500 which is $3,200 increase but total recovery cannot be more than original write-down loss i.e. 2,088 (5,300 – 7,388) therefore, the maximum inventory value that can be achieved is the original cost of inventory.

If entity recognized loss in cost of sales and directly in inventory then recovery entry will be as follows:

Inventory a/c2088
Cost of sales a/c2088

If entity is maintaining Allowance account instead of adjusting the inventory directly then journal entry can be:

Allowance for NRV loss a/c2088
Cost of sales a/c2088

Remember, if entity is using a separate account instead of cost of sales then on recovery of NRV loss it will also be recorded separately instead of crediting cost of sales a/c

If entity is recording recovery directly in inventory a/c then entry will be:

Inventory a/c2088
Recovery of NRV loss a/c2088

Recovery of NRV loss a/c will be later closed in profit and loss.

If entity is recording recovery with allowance then:

Allowance for NRV loss a/c2088
Recovery for NRV loss a/c2088

Источник: https://pakaccountants.com/courses/inventory/lower-cost-net-realizable-value-lcnrv-rule/

Экономический словарь — значение слова Net Realizable Value (nrv) (чистая Цена Реализации)

net realizable value

Чистая стоимость актива в случае его возможной продажи, т.е. сумма, которая будет получена за него, за вычетом издержек на продажу и доведение его до надлежащего состояния.

Смотреть значение Net Realizable Value (nrv) (чистая Цена Реализации) в других словарях

Цена — стоимость
Словарь синонимов

Цена — ж. достоинство, стоимость, плата, во что ставят вещь или труд, чего что-либо стоит, во что ценится в продаже или покупке; мера на деньги. На заветное и цены нет. Цены на хлеб……..
Толковый словарь Даля

Цена — и, мн. цены; ж. 1. Стоимость чего-н. (товара), выраженная в денежных единицах. товара не всегда совпадает с его стоимостью. Фабричная цена. Оптовые цены. Розничные цены. Рыночные……..
Толковый словарь Ушакова

Цена — Денежное выражение стоимости товара. О высокой, низкой и т. п. цене. Адская (разг.), аховая (разг.), баснословная, бешеная (разг.), божеская (разг.), большая, бросовая,……..

Словарь эпитетов

Цена Ж. — 1. Стоимость чего-л., выраженная в денежных единицах. // Плата, вознаграждение за что-л. // перен. Затраты, усилия, старания и т.п., употребленные на что-л. 2. перен. Роль, значение,……..
Толковый словарь Ефремовой

Аукционная Цена — — цена, по которой товары оцениваются и продаются на аукционе.
Юридический словарь

Базисная Цена — — 1) база при определении индекса цен международной торговли (экспортных и импортных) в целом и по отдельным группам товаров. Публикуются в международной и национальной……..
Юридический словарь

Базисная Цена Ценных Бумаг — — средняя цена ценных бумаг на определенный период времени, используемая для расчета рыночных показателей; изменения к этой цене делаются как в абсолютной величине, так и в процентах к «базе»
Юридический словарь

Биржевая Цена — — цена на товары, реализуемые в порядке биржевой торговли. Данные о Б. ц. приводятся в систематических публикациях, бюллетенях товарных бирж, сообщаются в периодических котировках.
Юридический словарь

Валовая Цена — — цена, включающая стоимость перевозки, страхования и разные мелкие расходы.
Юридический словарь

Внешняя Цена — — превышение рыночной цены опциона над суммой, которую можно было бы получить, если использовать опцион и реализовать товар.
Юридический словарь

Восстановленная Цена — — цена, достигшая прежнего уровня после цикла понижения или повышения.
Юридический словарь

Выручка От Реализации При Совершении Внешнеэкономических Операции — — денежные поступления от реализации продукции (работ; услуг), товаров и иного имущества при экспорте и импорте. При использовании метода определения выручки от реализации……..
Юридический словарь

Государственная Цена — — цена, устанавливаемая государственными органами.
Юридический словарь

Двойная Цена — — продажа идентичного товара на различных рынках по различным ценам.
Юридический словарь

Двойная Цена Золота — -различная цена золота на официальном государственном и свободном рынках, сложившаяся в результате такого разделения рынка в 1968 г. В последующем, в связи с прекращением……..
Юридический словарь

Действительная Цена — — цена, по которой фактически совершается сделка.
Юридический словарь

Демпинговая Цена — — согласно антидемпинговому закону: экспортная цена, которая ниже, чем на внутреннем рынке (на 20 % и более) или ниже мировой цены (на 8 %) и более.
Юридический словарь

Договорная Цена — — цена, которая устанавливается по взаимному соглашению между продавцом (производителем) и покупателем (потребителем) продукции в порядке, определенном органами……..
Юридический словарь

Долгосрочная Цена Безубыточности — — самая низкая с точки зрения долгосрочной перспективы цена, при которой фирма может перейти границу равенства издержек и выручки от продаж (нулевой прибыли)………
Юридический словарь

Цена — -ы́, вин. це́ну; мн. це́ны; ж.1. Денежное выражение стоимости товара или услуг; плата. Высокая, низкая ц. Розничная, оптовая, рыночная ц. Стабилизация цен. Назначить цену………

Толковый словарь Кузнецова

Единственная Цена — — твердая цена продажи или покупки, назначенная брокеру клиентом.
Юридический словарь

Заключительная Цена — — диапазон цен, курсов, котировок, зарегистрированных на бирже перед ее закрытием.
Юридический словарь

Закупочная Цена — Цена, по которой осуществляется закупка сельскохозяйственной продукции у производителей (Приказ Минторга от 14 декабря 1995г. N 80)
Юридический словарь

Заниженная Экспортная Цена — — контрактная цена на экспортируемый товар, сознательно установленная в целях повышения конкурентоспособности на мировом рынке ниже внутренней цены на подобный продукт……..
Юридический словарь

Интервенционная Цена — — повышенная цена закупки некоторых видов товаров, устанавливаемая директивно государством или группой государств на основе межправительственных соглашений……..
Юридический словарь

Исковая Цена — — денежная величина требования, заявленного истцом при подаче иска в суд, арбитраж, подлежащая взысканию с ответчика в пользу истца при положительном решении суда.
Юридический словарь

Картельная Цена — — монопольная цена, устанавливаемая участниками картеля в целях устранения конкурентов.
Юридический словарь

Комиссионная Цена — — цена, по которой реализуются товары через комиссионную торговлю.
Юридический словарь

Конвертируемая Цена — — цена акции в конвертируемой валюте, определенная в момент эмиссии и служащая эквивалентом для последующих трансакции.
Юридический словарь

Посмотреть в Wikipedia статью для Net Realizable Value (nrv) (чистая Цена Реализации)

Источник: http://slovariki.org/ekonomiceskij-slovar/49960

Net Realizable Value (Definition, Examples) | How it Works?

net realizable value

Net Realizable Value is value at which the asset can be sold in the market by the company after subtracting the estimated cost which the company could occur for selling the said asset in the market and it is one of the essential measures for the purpose of valuation of the ending inventory or receivables of the company.

    • Step 1. – Determine the Market Value of the Asset
    • Step 2. – List all the cost associated with the process of selling the Asset (including transportation, insurance, production, testing, tax, etc.)
    • Step 3. – Calculate NRV = Market Value of Asset – Selling Cost of the Asset

Net Realizable Value Example

A company XYZ Inc. is trying to get rid of some of its outdated phones, and it expects to sell them for $5,000 to a local buyer, but it must pay $240 to have them shipped and insured and another $40 to complete the paperwork.

So the telephones’ NRV can be calculated as $5,000 – $240 -$40, which is equal to $4,720.

Net Realizable Value in Inventory Valuation

NRV is a conservative method, which means that the accountant should post the transaction that does not overstate the value of assets, and that potentially generates less profit, for valuing assets. It usually requires certified public accountants (CPAs) to do the job as it involves a lot of judgment on their part.

Let us take an example to understand this in detail –

Year 1

Company ABC has an inventory i2 has a cost of $70. The market value of this inventory i2 is $200, and the preparation cost to sell this inventory i2 is $30.

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NRV = $200 – $70 – $30 = $100.

Since the cost of the inventory i2 is $70 is lower than NRV of $100, we value the inventory on the balance sheet at $70

Year 2

The market value of the inventory i2 declines to $150. Inventory i2 cost and the preparation cost to sell this inventory i2 remains the same at $70 and $30, respectively.

NRV = $150 – $70 – $30 = $50.

Since the cost of the inventory i2 is $70 is higher than the NRV of $50, we value the inventory on the balance sheet at NRV at $50

Inventory Write-Down = $70 – $50 = $20

In the context of net realizable value inventory, it is also important to understand that the companies using retail or the last in first out accounting would probably not use the net realized value or the lower of cost method, but would rather NRV inventory at lower of cost or market.

It is worth noting that the adjustments can be made for each item in inventory or for the aggregate of the entire net realizable value inventory to the lower of cost or NRV. Once curtailed down, the inventory account becomes the new basis for reporting purposes and valuation going forward.

US GAAP does not permit a write up of write-downs reported in a prior year, un international reporting standards, even if the NRV for inventory has recovered.

Net Realizable Value of  Accounts Receivables

NRV is actually the amount that is expected to turn into cash. Account receivables minus the credit balance give you the NRV, which can also be expressed as a debit balance in the asset account.

For instance, if the debit balances in the account receivables are $10,000 and have a credit balance of $800, then $9,200 is the resulting NRV of accounts receivables.

Conclusion

Net Realizable Value is the value of an asset, excluding a reasonable estimate of costs associated with the disposal of the asset or the eventual sale, which is realized or derived upon the sale of that asset.

It is commonly used in the context of inventory valuation and account receivables.

This method is very useful for an accountant as it allows them to follow the conservatism principle of accounting while reporting assets on the balance sheet.

This has been a guide to what is Net Realizable Value. Here we calculate NRV of inventory and accounts receivables along with practical examples. You may learn more about accounting basics from the following articles –

Источник: https://www.wallstreetmojo.com/net-realizable-value/

Net Realizable Value — Definition, How to Calculate, Example

net realizable value

Net realizable value (NRV) is the value for which an asset can be sold, minus the estimated costs of selling or discarding the asset.

The NRV is commonly used in the estimation of the value of ending inventoryInventoryInventory is a current asset account found on the balance sheet, consisting of all raw materials, work-in-progress, and finished goods that a company has accumulated.

It is often deemed the most illiquid of all current assets — thus, it is excluded from the numerator in the quick ratio calculation. or accounts receivable.

The net realizable value is an essential measure in inventory accounting under the Generally Accepted Accounting Principles (GAAP)GAAPGAAP, Generally Accepted Accounting Principles, is a recognized set of rules and procedures that govern corporate accounting and financial reporting in the US. and the International Financing Reporting Standards (IFRS). The calculation of NRV is critical because it prevents the overstatement of the assets’ valuation.

The NRV complies with a more conservatism approach to accounting. The conservatism approach directs accountants to use valuation methods that generate a smaller profit and do not overstate the value of the assets in situations when professional judgment is required for the evaluation of the transactions.

CFI’s Reading Financial Statements course will go over how to read a company’s complete set of financial statements.

NRV and Lower Cost or Market Method

Net realizable value is an important metric that is used in the lower cost or market method of accounting reporting.

Under the market method reporting approach, the company’s inventory must be reported on the balance sheet at a lower value than either the historical cost or the market value.

If the market value of the inventory is unknown, the net realizable value can be used as an approximation of the market value.

How to Calculate the NRV

The calculation of the NRV can be broken down into the following steps:

  1. Determine the market value or expected selling price of an asset.
  2. Find all costs associated with the completion and the sale of an asset (cost of production, advertising, transportation).
  3. Calculate the difference between the market value (expected selling price of an asset) and the costs associated with the completion and sale of an asset. It is a net realizable value of an asset.

Mathematically, the net realizable value can be found through the following equation:

However, the net realizable value is also applicable to accounts receivablesAccounts ReceivableAccounts Receivable (AR) represents the credit sales of a business, which are not yet fully paid by its customers, a current asset on the balance sheet. Companies allow their clients to pay at a reasonable, extended period of time, provided that the terms are agreed upon.. For the accounts receivable, we use the allowance for doubtful accounts instead of the total production and selling costs.

Example of Calculating the NRV

Company ABC Inc. is selling the part of its inventory to Company XYZ Inc. For reporting purposes, ABC Inc. is willing to determine the net realizable value of the inventory that will be sold.

The expected selling price of the inventory is $5,000. However, ABC Inc. needs to spend $800 to complete the goods and an additional $200 for transportation expenses. Considering the available information, the net realizable value of the inventory should be calculated in the following way:

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  • Asset DealAsset DealAn asset deal occurs when a buyer is interested in purchasing the operating assets of a business instead of stock shares. It is a type of M&A transaction. In terms of legalese, an asset deal is any transfer of a business that is not in the form of a share acquisition.
  • Depreciation MethodsDepreciation MethodsThe most common types of depreciation methods include straight-line, double declining balance, units of production, and sum of years digits. There are various formulas for calculating depreciation of an asset. Depreciation expense is used in accounting to allocate the cost of a tangible asset over its useful life.
  • Market Valuation ApproachMarket Valuation ApproachThe market approach is a valuation method used to determine the appraisal value of a business, intangible asset, business ownership interest, or security by
  • Valuation MethodsValuation MethodsWhen valuing a company as a going concern there are three main valuation methods used: DCF analysis, comparable companies, and precedent

Источник: https://corporatefinanceinstitute.com/resources/knowledge/valuation/net-realizable-value-nrv/

Net Realizable Value Formula | Calculator (Excel Template)

net realizable value

Net Realizable Value Formula (Table of Contents)

Net Realizable Value Formula

Net realizable value (NRV) is the value of an asset which can be realized when that asset is sold. It is also termed as cash Realizable value since it is the cash amount which one gets for the asset. All the related cost disposal cost, transportation cost etc.

should be subtracted while calculating a net realizable value. NRV is basically used for inventory valuation in both GAAP (Generally Accepted Accounting Principal) and in IFRS (International Financial Reporting Standards) so that inventory is properly stated in the balance sheet.

So during inventory valuation, NRV is the price cap for the asset if we use a market method of accounting. In that method, inventory is valued at either historical cost or market value, whichever is lower.

If we are not able to determine the market value, NRV can be used as a proxy for that.

The formula for Net Realizable Value –

Net Realizable Value = Expected Selling Price – Total Selling Cost

Following are the steps which can be used to find net realizable value:

  • First of all, we need to determine the expected selling price or the market value of inventory.
  • Next step is to determine all the cost associated with the sale of an asset. It can be preparation cost, testing, transportation, etc. Find all those costs.
  • Subtract all the cost from the selling price to come at the net realizable value.

Examples of Net Realizable Value Formula (With Excel Template)

Let’s take an example to understand the calculation of Net Realizable Value formula in a better manner.

Net Realizable Value Formula – Example #1

Let say that there is company X which makes automobile spare parts. Now X has a number of machines which it uses to produce the items. One of those machine X wants to sell since it is not much use.

Company X is expecting that if they sell that machine today, they will get $5000 for that. But they have to go through a middle man which will charge $100 as it cost.

Also, the company has to bear all the paperwork and transportation cost which is another $200.

Solution:

Total Cost is calculated as:

  • Total Cost = $100 + $200
  • Total Cost = $300

Net Realizable Value is calculated using the formula given below

Net Realizable Value = Expected Selling Price – Total Selling Cost

  • Net Realizable Value = $5,000 – $300
  • Net Realizable Value = $4,700

Net Realizable Value Formula – Example #2

Now let see a more detailed example to see how we report inventory using net realizable value formula.

Let continue with the above example. We have calculated the net realizable value of the machine is $4700. Let’s say the carrying cost of this machine in the balance sheet is $4000. Since the carrying value of the machine is lower than the NRV, we will keep on reporting the machine at its carrying value.

Now let’s say after 2 years, the demand for that machine decline because of which the expected market price also decreases and now it has dropped to $4100 but the cost is the same at $4000.

So

  • Net Realizable Value = $4,100 – $300
  • Net Realizable Value = $3,800

Since NRV has dropped from $4700 to $3800 and this new value is less than the carrying cost of the machine, a company has to report the machine at the NPV also book loss in its financials. The loss amount will the differential amount between carrying cost and NRV i.e. $4000 – $3800 = $200

Explanation

Net realizable value, as discussed above can be calculated by deducting the selling cost from the expected market price of the asset and plays a key role in inventory valuation. Every business has to keep a close on its inventory and periodically access its value.

The reason for that is there are several negative impacts damage of inventory, obsolescence, spoilage etc. which can affect the inventory value in a negative way.

So it is better for a business to write off those assets once for all rather than carrying those assets which can increase the losses in the future.

Inventories, in general, cannot be revalued upward once written down. There is a certain exception to that as well. If once the asset is written down and new assessment states that the net realizable value has increased from the previous amount, the previous write down can be reversed but that can only be done up to the upper limit of previous write down.

Relevance and Uses of Net Realizable Value Formula

NRV is the total amount which a company can expect while selling its assets. It is used by businesses to value their inventory and it uses a conservative approach while valuing the inventory.

Analysts, who are analyzing companies financial can also check if the company is valuing its assets following proper accounting method. NRV helps businesses to assess the correct value of inventory and see if there is any negative impact on valuation. NRV is a very conservative approach to accounting.

This approach expects the businesses to value their inventory at a conservative value and avoid overstating it.

Net Realizable Value Formula Calculator

You can use the following Net Realizable Value Calculator

Net Realizable Value Formula =Expected Selling Price – Total Selling Cost
=0 – 0
=0
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