Lower of cost or NRV
Lower of cost or NRV requires inventories to be measured at whichever is lower — historical cost or net realisable value — writing stock down when it can no longer be sold for at least what it cost.
FrameworkPrudence
See it move
A retailer holds 500 units bought at €40 each, a €20,000 cost. Demand falls, so the units can now only fetch €35, less €2 of selling costs, for a net realisable value of €33. Because €33 is below cost, the stock is written down by €3,500 to a carrying value of €16,500, with the loss expensed immediately under the prudence concept.
The formula
Variables
- Net realisable value (€)
- Estimated selling price in the ordinary course of business (€)
- Further costs to complete production plus estimated selling costs (€)
Represents the economic benefit the item will ultimately generate net of any further costs to realise it.
Variables
- Historical cost (purchase price plus attributable acquisition costs) (€)
- Net realisable value (€)
When NRV falls below cost, a write-down is recognised immediately as an expense; prudence prevents overstating inventory.