Net realizable value

Written by Fmi.Online Friday December 9, 2022
Net realizable value (NRV) is the net asset value that a seller receives for selling an asset after deducting the costs associated with the sale or disposal of the product. The net realizable value formula is calculated by subtracting the cost of making the sale from the sale price. It is essentially the amount of money a company will make from selling an asset after it pays the selling costs. Selling costs could include marketing costs, advertising costs, or even product demonstration costs.

Explanation :

  The NRV is used in inventory accounting to estimate the proceeds of a sale or how much the selling price exceeds the costs incurred in the sale of an asset. Usually, when using NRV, analysts employ the lower cost or market (LCM) method, under which the value assigned to inventory is the lower market replacement cost, usually equaling the initial purchase price. NRV is also used when calculating how much of the expected accounts receivable might turn into cash. Both GAAP and IFRS principles require companies to use NRV in inventory valuation.

In a nutshell :

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