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NET REALIZABLE VALUE
Inventories are written down to net realizable value (NRV) on the basis that assets should not be carried in excess of amounts likely to be realized from their sale or
use. Write-down of inventories becomes necessary for several reasons; for example, inventories may be damaged or become obsolete or their selling prices may have
declined after year-end (or period-end).
Inventories are usually written down to their NRV on an item-by-item basis, but in certain conditions, also by a group of similar or related items. It is, however, not
appropriate to mark down inventories by classification of inventories, such as finished goods, or all inventories in a geographical segment or industry.
NRV estimates are based on the most reliable evidence of the inventories’ realizable amounts. They take into account price fluctuations or costs directly related to
events after the period-end, confirming conditions that exist at the period-end. Estimates of NRV also take into account the reason or purpose for which inventories are
held. For instance, NRV of a quantity of inventory being held to satisfy firm sales contracts or service contracts are based on contract prices.
Inventories of raw materials and other supplies held for use in the production of inventories are not written down below cost if the finished goods in which they will
be used are expected to be sold at or above cost. However, when a decrease in the price of raw materials indicates that the cost of the finished goods exceeds net
realizable value, the materials are written down to NRV. In such cases, the replacement cost of the raw materials may be the best available measure of their NRV.
NRV is assessed in each successive period. If changes in economic circumstances warrant, earlier write-downs are reversed to make the new carrying amount equal
to the lower of cost and the revised NRV.
Facts
CASE STUDY 4
Moonstruck Enterprises Inc. is a retailer of Italian furniture and has five major product lines: sofas, dining tables, beds, closets, and lounge chairs. At
December 31, 200X, quantity on hand, cost per unit, and net realizable value (NRV) per unit of the product lines are as follows:
Required
Compute the valuation of the inventory of Moonstruck Enterprises at December 31, 200X, under IAS 2 using the “lower of cost and NRV” principle.
Solution
RECOGNITION OF EXPENSE
When inventory is sold, the carrying amount of inventory should be recognized as an expense when the related revenue is recognized. Moreover, the amount of any
inventory written down to net realizable value is recognized as an expense. The amount of any reversal of a write-down of inventory should be a reduction to the
amount written off in the period it was reversed.
The financial statements should disclose
DISCLOSURE