Net Realizable Value (NRV) is an accounting measure used to determine the value of an asset in terms of its potential sale proceeds, after considering the costs necessary to sell or complete the asset. For instance, in terms of inventory valuation, NRV helps businesses determine the lower of cost and NRV to represent their inventory's value in financial reporting accurately.
NRV is calculated by estimating the expected selling price of the asset and then subtracting any costs required to make the asset ready for sale, such as completion costs, transportation, or selling expenses. This concept ensures a conservative estimate of an asset's value is reflected, avoiding overstatement in financial statements.
For example, if an item of inventory is expected to sell for $100 but requires $20 in packaging and selling costs, its NRV would be $80. Therefore, when matching the value of the inventory to its cost basis in the accounting records, the NRV rule might guide the business to write down the value if the cost exceeds the NRV.