What Is Net Realizable Value (NRV)? Calculation and Uses
By Markets & Investing DeskUpdated Nov 10, 2026
Definition
Net realizable value is the amount a company expects to collect from selling an asset in normal business, minus the costs still needed to complete and sell it.
Key takeaways
- NRV equals the expected selling price minus the estimated costs still required to complete and sell the asset.
- Under lower of cost and NRV, inventory stays at cost until NRV falls below cost, then is written down to NRV.
- IFRS requires reversing a write-down when conditions recover, while US GAAP treats the reduced amount as the new cost.
- US GAAP inventory measured with LIFO or the retail method still follows the older lower of cost or market test.
Net realizable value (NRV) is the amount a company expects to collect from selling an asset in the ordinary course of business, minus the costs still required to complete and sell it. Accountants use NRV mainly to value inventory and accounts receivable, so that the balance sheet does not carry these current assets at more than the cash they are likely to bring in. The British spelling, net realisable value, refers to the same measure.
How Net Realizable Value Works
NRV looks forward. Historical cost records what the company paid; NRV records what it can realistically get back once it finishes, ships and sells the asset.
The deductions are costs the company still has to incur to make the sale, not costs it has already spent. Depending on the asset, they can include:
- Remaining production or completion costs for unfinished goods
- Sales commissions and brokerage fees
- Packaging, shipping and delivery charges
- Taxes and duties tied to the sale
- Advertising or other direct marketing costs for the specific goods
NRV Formula and Calculation
The basic formula is:
NRV = Expected selling price − Estimated costs to complete and sell
The expected selling price is the price the company can reasonably achieve in its normal market, not a distressed liquidation price unless liquidation is what the company actually expects.
Inventory example (hypothetical)
A retailer holds 1,000 winter jackets bought at $60 each, for a total cost of $60,000. Late in the season, it expects to sell them at $70 each, with shipping and commissions of $15 per jacket.
- Expected selling price: 1,000 × $70 = $70,000
- Costs to sell: 1,000 × $15 = $15,000
- NRV: $70,000 − $15,000 = $55,000
Cost is $60,000 and NRV is $55,000, so the retailer writes the inventory down by $5,000. That loss usually appears in cost of goods sold on the income statement, and the inventory is carried at $55,000.
Accounts receivable example (hypothetical)
A company has $50,000 of unpaid customer invoices and estimates that $15,000 will not be collected. The NRV of its receivables is $50,000 − $15,000 = $35,000. In practice the uncollectible estimate is recorded as an allowance (an allowance for doubtful accounts or for credit losses), and the receivable is shown net of that allowance.
Lower of Cost and Net Realizable Value
The main reporting use of NRV is the inventory rule known as lower of cost and net realizable value (LCNRV). Inventory stays at cost until NRV falls below cost; at that point it is written down to NRV. Common triggers include damage, spoilage, obsolescence, falling market prices and rising selling costs.
Under IFRS
IAS 2, Inventories, requires inventory to be measured at the lower of cost and net realisable value. Write-downs are usually made item by item, or by groups of similar items. If the conditions that caused a write-down later reverse, IFRS requires the write-down to be reversed, limited to the original amount, so inventory never ends up above cost.
Under US GAAP
Under ASC 330, as amended by ASU 2015-11, inventory measured using FIFO or average cost is reported at the lower of cost and NRV. Inventory measured using LIFO or the retail inventory method still follows the older lower of cost or market test. There, “market” generally means replacement cost, capped at NRV and floored at NRV minus a normal profit margin. Once US GAAP inventory is written down, the reduced amount becomes the new cost basis, and the write-down is not reversed if prices recover.
Nike’s 2024 Form 10-K, for example, says it estimates inventory NRV based on expected future demand and that reserves would increase if market changes reduced NRV.
NRV in Cost Accounting: Allocating Joint Costs
Some processes produce several products from one input until a split-off point, after which each product is finished separately. Refining crude oil and processing meat are standard cases. The shared costs before split-off must be divided among the products, and the NRV method does this in proportion to each product’s NRV.
For this purpose, a product’s NRV is its final selling price minus the separable costs incurred after split-off.
Hypothetical example: A process costs $60,000 and yields two products.
| Product A | Product B | |
|---|---|---|
| Final sales value | $80,000 | $50,000 |
| Separable costs after split-off | $20,000 | $10,000 |
| NRV | $60,000 | $40,000 |
| Share of total NRV | 60% | 40% |
| Joint cost allocated | $36,000 | $24,000 |
Allocating by NRV, rather than by physical units, ties each product’s cost share to its ability to generate revenue. Management then sees each product’s full cost and gross margin when setting prices or deciding whether to process further.
NRV vs. Related Measures
Fair value. Under IFRS 13 and ASC 820, fair value is the price that would be received to sell an asset in an orderly transaction between market participants. It is market-based and does not deduct selling costs. NRV is entity-specific, reflecting the price and costs this particular company expects in its own normal business, so the two can differ for identical goods. IAS 2 notes that NRV for inventory may not equal fair value less costs to sell.
Replacement cost. This is what it would cost to buy or produce the asset again today. It matters for the US GAAP lower of cost or market test, but it measures an input price, while NRV measures an exit amount.
Residual or salvage value. This is the estimated amount left at the end of a long-lived asset’s useful life, used in depreciation. NRV applies to assets held for sale or collection in the normal operating cycle.
Net realized value. This term sometimes appears by mistake. “Realized” describes a sale that has already happened, while NRV is an estimate made before the sale.
Benefits and Limitations
NRV gives investors and lenders a realistic view of current assets on the balance sheet, recognizes losses when they become apparent instead of when the goods finally sell, and is required by accounting standards for inventory measurement.
Its weaknesses come from its reliance on judgment:
- Estimates can miss. Selling prices and costs are forecasts, and the actual sale may realize more or less than the recorded NRV.
- Values need regular review. NRV must be reassessed each period as prices, demand and shipping costs change, which takes time for companies with large or varied inventories.
- Comparability suffers. Similar companies can reach different NRVs from different assumptions, and write-down timing can shift reported margins between periods.
- Volatile markets complicate it. Sharp price swings in commodities or seasonal goods make the expected selling price harder to pin down.
FAQs
Does NRV apply to fixed assets?
Not as the main measurement test. NRV is used for current assets such as inventory and receivables. Long-lived assets like equipment are tested for impairment under separate rules, which use measures such as recoverable amount under IFRS or fair value under US GAAP.
The Bottom Line
Accountants, investors and lenders rely on NRV to keep inventory and receivables from being carried above the cash they will likely bring in. Companies must review these estimates each period because prices, demand and selling costs change. Readers comparing firms should remember that NRV depends on judgment, so different assumptions and write-down timing can shift reported margins between periods.
