What is net realizable value?
Before answering this question, the issue is oriented to all companies that produce and/or trade inventories and that according to International Accounting Standard No. 2 “Inventory” requires companies to evaluate whether their goods are impaired in a given period. This same accounting standard establishes that inventories shall be measured at the lower of cost or net realizable value.
Thus, net realizable value, according to IAS 2, is the estimated selling price of an asset in the normal course of business less the estimated costs to complete production and those necessary to make the sale. In other words, it is a way to determine whether the costs allocated to inventories are above or below the net realizable value.
How do I determine net realizable value?
The formula for determining net realizable value (NRV) is as follows:
VNR = ESTIMATED SALES PRICE - ESTIMATED COSTS TO COMPLETE PRODUCTION - ESTIMATED COSTS REQUIRED FOR SALE
Should the net realizable value be calculated for each inventory item?
IAS 2 indicates that generally the cost of the inventory should be reduced to the net realizable value and for that purpose it will be calculated for each inventory item; however, it may be appropriate to group the items by family, product lines, etc.
Should the net realizable value be calculated for the entire inventory cycle?
IAS 2 indicates that it is not applicable to write down raw materials and other supplies, held for use in the production of inventories, as long as the finished products in which they are incorporated are expected to be sold at or above cost. In other words, it is not advisable to calculate the net realizable value of items in the production process.
Where is the expense presented in the statement of income for reducing the cost of inventory to net realizable value?
The amount of any write-down to net realizable value is recognized as an expense and recognized in the period in which the write-down occurs. In the statement of income, this expense will be presented according to its nature, generally as general expenses.
What is the tax impact of writing down the value of the inventory until the net realizable value is determined?
The tax jurisdiction of each country must be evaluated. In the event that the tax authorities do not accept this expense as deductible in determining the income tax, a deferred income tax asset or liability will be determined in accordance with International Accounting Standard No. 12 “Income Taxes”.