Lesson 4 of 6 · 13 min
Measuring inventory: lower of cost and net realisable value
Inventory may not stay on the balance sheet above what it can be sold for, so it is written down when its value falls; IFRS reverses the write-down if value recovers, US GAAP never does.
In short
- IFRS: inventory at the lower of cost and net realisable value (NRV). NRV = estimated selling price − costs to complete and sell.
- The write-down is an expense, usually in cost of sales. IFRS requires a reversal when value recovers, capped at the original write-down and recognised as a reduction in cost of sales.
- US GAAP: lower of cost and NRV for methods other than LIFO and the retail method; lower of cost or market for LIFO and retail.
- Market = current replacement cost, capped at NRV and floored at NRV minus a normal profit margin.
- US GAAP prohibits reversals. Producers of agricultural and forest products and minerals, and commodity broker-traders, may carry inventory at NRV (fair value less costs to sell), even above cost, with changes in profit or loss.
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