Net Realizable Value
The estimated selling price of an asset minus costs to complete and sell it.
What is Net Realizable Value?
Net realizable value (NRV) is the estimated amount a company expects to receive from selling an asset in the ordinary course of business, after deducting any costs necessary to make the asset salable — such as completion costs, selling expenses, and estimated allowances. NRV is the measurement basis for inventory under both GAAP (ASC 330) and IFRS (IAS 2), applying the lower-of-cost-or-NRV rule that prevents carrying inventory above what it can realistically generate in cash. NRV is also used to assess the collectability of accounts receivable, where gross receivables are reduced to NRV by subtracting estimated uncollectible amounts.
Example
A manufacturer holds raw materials with a cost of $80,000. Finished goods can be sold for $100,000, but $25,000 in additional conversion costs and $5,000 in selling costs are required. NRV = $100,000 − $25,000 − $5,000 = $70,000. Because NRV ($70,000) is below cost ($80,000), inventory is written down to $70,000.
Source: FASB Accounting Standards Codification — ASC 330 Inventory