Entity-specific inventory recovery estimate equal to expected ordinary-course selling price less completion and sale costs.
Net realizable value (NRV) is the estimated selling price of inventory in the ordinary course of business, less the estimated costs of completion and the costs necessary to make the sale. Under IAS 2, inventory is measured at the lower of cost and NRV so that expected losses are recognized before the inventory is sold.
NRV is entity-specific. It reflects what the reporting company expects to realize from its inventory, not a generic market-participant price.
Costs necessary to sell are not automatically every cost allocated to the product or business. The entity should identify incremental or otherwise necessary selling costs under the applicable guidance and facts.
Assume a company holds 1,000 partially completed units with these estimates per unit:
| Item | Amount per unit |
|---|---|
| Inventory cost | $55 |
| Expected selling price | $58 |
| Completion cost | $4 |
| Necessary selling cost | $2 |
NRV per unit is:
Because $52 NRV is below $55 cost, the simplified write-down is $3 per unit:
The inventory carrying amount falls from $55,000 to $52,000, and the $3,000 write-down is recognized as expense under IAS 2.
If conditions later improve and NRV rises to $56 per unit while the units remain on hand, the carrying amount can be restored only to the original $55 cost in this example. The reversal cannot create an inventory amount above cost.
NRV estimates can change because of:
The estimate should be based on conditions relevant at the reporting date. A later sale can provide evidence about year-end NRV, but a new event arising after year-end may require different subsequent-event analysis.
| Measure | Perspective | Typical use |
|---|---|---|
| Net realizable value | Entity-specific expected sale recovery after completion and necessary sale costs | Inventory under IAS 2 |
| Fair value | Market-participant exit price at measurement date | Used when another standard requires or permits fair value |
| Fair value less costs of disposal | Market-based fair value less direct disposal costs | One component of recoverable amount under IAS 36 |
| Recoverable amount | Higher of value in use and fair value less costs of disposal | Impairment of assets within IAS 36 scope |
| Replacement cost | Current cost to replace service capacity | Different measurement or analytical context |
| Expected collectible amount | Contractual receivable adjusted for credit losses | Receivables under financial-instrument rules |
Calling each of these “what the asset is worth” obscures the purpose and inputs of the measurement.
IAS 2’s NRV definition specifically addresses inventory. In broader accounting language, people sometimes describe a receivable’s net expected collection as net realizable value. Under IFRS, however, trade receivables are financial assets and credit impairment is governed by IFRS 9 rather than the IAS 2 inventory formula.
For receivables, expected credit loss, contractual cash flows, time value, and collection evidence can matter. For inventory, completion and sale economics are central. Analysts should not apply one model mechanically to the other.
IAS 2 generally assesses write-downs item by item. Similar or related items may sometimes be grouped when they share product line, purpose, market, and other relevant characteristics. Broadly offsetting losses on one inventory category with gains on unrelated items can hide overstatement.
Materials held for use in production are not usually written below cost when the finished goods in which they will be incorporated are expected to sell at or above cost. A decline in replacement cost can nevertheless indicate that finished-goods cost may not be recoverable.
An inventory write-down can:
A later reversal improves profit in that period under IAS 2, but it does not necessarily signal stronger sales. It may reflect updated price, cost, or demand estimates.
This page is educational and is not accounting, audit, tax, legal, valuation, or investment advice.