Definition
Since ASU 2015-11, inventory measured using FIFO or average cost is reported at the lower of cost and net realizable value (NRV). NRV is estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. Inventory measured under LIFO or the retail inventory method continues to use lower of cost or market. A write-down creates a new cost basis, and recoveries in later fiscal years are not reversed.
Why it matters in an audit or review
Slow-moving, obsolete, damaged, and discounted items are the focus. Auditors review aging reports, subsequent sales prices, and management's reserve method, testing at item or group level consistently. The inventory reserve is an estimate under AU-C 540.
Example
(Illustrative) 1,000 units cost $20 each. Estimated selling price is $23, with $4 of selling and disposal costs. NRV is $19.
Dr Cost of goods sold 1,000 Cr Inventory (or reserve) 1,000
Common mistakes
- Using a flat percentage reserve with no tie to sales prices.
- Reversing a write-down when prices recover.
Sources
- FASB ASC 330-10-35 (subsequent measurement of inventory) and the ASC master glossary definition of net realizable value
- FASB ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory
- AICPA, AU-C Section 540, Auditing Accounting Estimates and Related Disclosures
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error