Definition
Net realisable value is the estimated selling price of inventory in the ordinary course of business, minus the estimated costs to complete it and the costs needed to make the sale. Under IAS 2, inventory is measured at the lower of cost and net realisable value, so stock that has become damaged, obsolete or cheaper to sell is written down.
How it works
NRV is entity specific: it is what this business expects to get for these goods, not a market quotation. Estimate it at each reporting date from current selling prices and recent sales after the period end.
Compare cost and NRV item by item, or for groups of similar items, never for inventory as a whole: a profit on one product cannot hide a loss on another. The write-down is an expense in the period it occurs, and if NRV later recovers, IAS 2 requires the write-down to be reversed up to the original cost.
In Ledgeriano a write-down to net realisable value is a stock document that posts its own balanced journal entry, so the stock ledger and the general ledger stay reconciled.
Formula
NRV = Estimated selling price - Costs to complete - Costs to sell
Write-down = Cost - NRV (only if NRV < Cost)
Example: last season's jackets
A retailer holds 200 jackets that cost 50 each. They can now be sold for 60 only after alterations costing 8 and a marketplace fee of 6. NRV is 60 - 8 - 6 = 46, so each jacket is written down by 4, a total of 800.
| Account | Debit | Credit |
|---|---|---|
| Inventory write-down (cost of sales) | 800 | |
| Inventory (or allowance for obsolescence) | 800 |