Net realisable value
AccountingThe estimated selling price of inventory less the costs still to be incurred to complete and sell it, and the ceiling IAS 2 places on its carrying value.
Also written: NRV, lower of cost and net realisable value
IAS 2 carries inventory at the lower of cost and net realisable value. Cost is what the company paid to bring the goods to their present condition and location. Net realisable value is what it expects to get for them, less the costs of finishing and selling them. Whichever is lower is what appears on the balance sheet.
When net realisable value falls below cost, the shortfall is written off through cost of sales, so an obsolescence problem shows up as a margin problem in the period it is recognised. It is a non cash charge in that period, but unlike depreciation it is a signal about demand rather than about the passage of time, and a recurring one is a warning about how the business buys.
There is a genuine framework divergence here and it runs the opposite way from the LIFO one. IFRS requires the write down to be reversed, up to but never above original cost, if net realisable value later recovers. US GAAP treats the written down amount as a new cost basis and forbids the reversal.
That matters when reading a recovery. An IFRS reporter emerging from a bad year can show a margin lifted by a reversal of a previous write down, which is not trading profit and should be normalised out before the period is used as a base.
Worked example
A retailer holds a seasonal range at a cost of €5.0M. After the season it expects to clear it for €4.5M and to spend €0.3M on markdown and distribution.
Net realisable value is €4.2M, below the €5.0M cost, so €0.8M is written off through cost of sales in that period.
If the market recovers and net realisable value rises to €4.9M, IFRS requires €0.7M of the write down to be reversed. Under US GAAP the €4.2M would stand as the new cost.