Net Realizable Value (NRV): A Key Tool for Decision-Making?


By: José Encalada, Business, Services & Outsourcing Manager


In my professional experience, I have observed that a significant number of companies do not calculate or record the Net Realizable Value (NRV) of their inventories.

This issue is typically questioned by external auditors, who often propose adjustments to financial statements that have already been issued at each year-end. These adjustments lead to reprocessing and affect the reliability and timeliness of financial information.


I. Accounting standpoint, IFRS, and decision-making:

From an accounting standpoint and within the IFRS framework, the timely calculation and recording of the NRV are essential for the decision-making process of the Company’s Management, as it allows inventories to be presented at their recoverable value, reasonably reflecting the Company’s economic reality.


II. Importance of recognizing the NRV:

Acountants must prepare the NRV calculation, analyze it, and discuss it with the Company’s Management to ensure its proper recognition. Recording the NRV is important for the following reasons:

  • It prevents the overstatement of assets, strengthening the reliability of the financial statements.
  • It allows for the timely identification of impairment and obsolescence.
  • It provides relevant and reliable financial information to support strategic decisions related to pricing, margins, and inventory management.

 

III. How is Net Realizable Value calculated?

Net Realizable Value is calculated as the estimated selling price of inventory, less the estimated costs necessary to complete its production and the costs required to make the sale, such as marketing, distribution, or commission expenses.

This analysis must be performed for each individual inventory item or for homogeneous groups, taking into account current market conditions, inventory turnover, obsolescence, and sales expectations. It must be updated periodically, especially at the closing of each year.

 

Conclusion

Proper calculation of the NRV not only ensures compliance with IFRS but also serves as a key financial management tool, which enhances the quality of financial information and supports better decision-making by the Company’s Management.


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