Formula to Calculate Net Realizable Value (NRV)

Net Realizable is a valueNet Realizable Is A ValueNet Realizable Value is a value at which the asset may be sold in the market by the company after deducting the expected cost of selling the asset in the market. It is a crucial metric for determining the value of a company’s ending inventory or receivables.read more of an asset at which it can be sold after deducting the cost of selling or disposing of the asset. It is mainly used in identifying the value of inventory or account receivables. Since in NRV, a firm also considers the cost, hence it is known as a conservative approach to the transaction. A conservative approachConservative ApproachThe conservatism principle of accounting guides the accounting, according to which there is any uncertainty. All the expenses and liabilities should be recognized. In contrast, all the revenues and gains should not be recorded, and such revenues and profits should be recognized only when there is reasonable certainty of its actual receipt.read more means that the firm should not overstate the profit by showing a lesser value of its assets.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Net Realizable Value Formula (wallstreetmojo.com)

Calculation of Net Realizable Value (Step by Step)

Examples

Example #1

Let’s say a firm has an asset with a market value of $100. The cost of shipping that asset is $20, and commission charges are $10.

  • Identify the market value of the asset. Identify the cost related to the sale of the asset. Subtract the cost from the market value of the asset. It is calculated by subtracting the cost of selling or disposing of the asset from its market value. NRV = Market Value of Asset – A Cost of Selling that Asset Under the cost of selling, the firm calculates any kind of costs which are associated with the sale of that asset, such as transportation or commission cost. If the asset is Accounts Receivable, then, there is no physical cost such as transportation. But there can be some customers who can default on paying to the company. For calculating NRV of Account Receivables, a firm will have to calculate that amount that can be defaulted by customers, which are known as “Provision for Doubtful Debts.” NRV of Account Receivables = Market Value- Provision for Doubtful Debts

NRV = Market Value of Asset – A Cost of Selling that Asset

NRV of Account Receivables = Market Value- Provision for Doubtful Debts

Use the following data for the calculation of the Net Realizable Value.

Calculation of Net Realizable Value can be done as follows,

The total cost of selling = $30

Hence Net Realizable Value of Asset = $100 – 30

NRV will be –

NRV =$70

Example #2

IBM is a US-based software company with more than $80 Bn of revenue per year. In the Financial year 2019, the market value of Accounts ReceivableAccounts ReceivableAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more (which is an asset) for IBM is $10 Bn. This means IBM is expected to receive this amount from customers who have already been recognized as revenue in its accounts. So, the value of this asset is $10 Bn. But for calculating the Net Realizable Value, IBM will have to identify the customers who can default on their payments. This amount is entered into accounts as “Provision for Doubtful Debts.” Let’s say this amount is $1 Bn.

So Net Realizable value for “Account Receivable” for IBM can be calculated as follows:

NRV = Market Value- Provision for Doubtful Debts

NRV= 10- 1

Hence with conservative method NRV of Account Receivable for IBM is $9 Bn.

Example #3

Walmart is a US-based retail supermarket chain-based company with around $500Bn of revenue in 2018. In the Financial year 2018, the market value of inventory (which is also an asset) for Walmart is around $44 Bn. Out of it, Walmart is going to sell some part of the inventory to another company for $4 Bn for offloading purposes. Walmart needs to decide the NRV of this part of the inventory. For that, Walmart needs to calculate the cost associated with the Sale of Inventory. The transportation cost is $500 Mn, and legal and registration charges are $100 Mn.

So NRV can be calculated as per below method:

NRV Formula = Market Value- Transportation Cost – Legal and Registration Cost

NRV = 4-0.5- 0.1

The NRV will be –

Hence with the conservative method, the NRV of Inventory is $3.4 Bn.

Relevance and Use

  • The net realizable valueRealizable ValueRealizable value is the net consideration from sales proceeds of any assets in the normal course of business after deduction of incidental expenses. It is common for the valuation of inventories under International Financial Reporting Standards and other accepted accounting policies.read more (NRV) formula can be used to determine the value of an asset more conservatively. Usually, GAAPGAAPGAAP (Generally Accepted Accounting Principles) are standardized guidelines for accounting and financial reporting.read more  requires companies to not overstate the value of an asset that can increase the profit and send some wrong signals to investors.NRV also considers the cost of selling in its equation, so NRV comes out to be lower than the market value of an asset.NRV is an important metric in the “lower cost or market method of accounting.” In the lower cost or market methodLower Cost Or Market MethodLower of cost or market (LCM) is the conservative way through which the inventories are reported in the books of accounts. It states that the inventory at the end of the reporting period is to be recorded at the original cost or the current market price, whichever is lower.read more, the value of inventory should be shown lesser between the historical costHistorical CostThe historical cost of an asset refers to the price at which it was first purchased or acquired.read more and the market value in the accounts. If the company cannot determine the market value of inventory, then NRV can be a proxy for the same.

This has been a guide to the Net Realizable Value Formula. We discuss calculating the net realizable value using its formula, practical examples, and a downloadable excel template. You can learn more about accounting from the following articles –

  • Excel Value FormulaExcel Value FormulaIn Excel, the value function returns the value of a text representing a number. So, if we have a text with the value $5, we can use the value formula to get 5 as a result, so this function gives us the numerical value represented by a text.read moreMark to Market AccountingFair Value vs. Market ValueRate of Return on InvestmentRate Of Return On InvestmentRate of Return on Investment is the rate at which a company generates a return on investment during a period when compared to the cost of the investment made by the company. It is calculated by dividing the return on investment during the period by the cost of the investment.read moreBadwillBadwillThroughout your career, it will help you take up diverse roles such as a public accountant, financial consultant, tax advisor, CFO, auditor, controller, or federal officer, etc., depending on your skills or experiences. As a result, the license is one of the most coveted ones in accountancy in the world.read more