net realizeable value (NRV) and replacement value

CFA Level I
#1

Hi all,

I can’t figure out the difference exactly between the two valuation.

  • Net realizable value: is equal to the selling price less any completion costs and disposal (selling) costs.

  • replacement cost or Market: the cost of replacement of an asset at equal value. and it said it should be < NRV and > ( NRV-profit margin).

  1. well ,it seems that both are about the selling price ( = or purchase), only in NRV we substract costs of selling, so how come NRV> market ??

  2. it said in the reading that US GAAP require reporting inventories under the least of cost or market and IFRS the least of cost or NRV, but I found in investopedia that NRV is a rule of US GAAP ?? which one is correct and why this confusion?

many thanks guys for the help

#2

It didn’t say that replacement cost should be between NRV and NRV less a normal profit.

What it said is that you should use replacement cost, but you’re not allowed to go over NRV, and you’re not allowed to go under NRV less a normal profit.

So, if NRV is $100 and the normal profit is $10, then:

  • If replacement cost is $80, you have to use $90 (you cannot go below NRV less a normal profit, or $100 − $10 = $90).
  • If replacement cost is $95, you use $95.
  • If replacement cost is $110, you have to use $100 (you cannot go avobe above NRV, or $100).

Market is essentially NRV.

#3

Thanks so much Magician. 1) it’s clear now, I misunderstand the meaning.

  1. do you mean Market is a type of NRV ?? I’m sorry I can’t still make apart the two concepts :confused:

I should blame frensh accounting, it’s nothing to do with these concepts, u can say it’s like elemantry school maths :frowning:

PS; I checked your website, really owsome, best of luck :slight_smile:

#4

The term Market refers to the replacement cost . You will find a very good explanation here (it repeats the same thing S2000 said above):

http://www.accountingcoach.com/lower-of-cost-or-market/explanation

​From there:

"In the term lower of cost or market the word “market” refers to an item’s current replacement cost (whether through purchase or production). The market amount is constrained or limited by two amounts: (1) an upper limit, or “ceiling,” and (2) a lower limit, or “floor.” An item’s market amount (or replacement cost) cannot be higher than the ceiling nor lower than the floor.

Both the upper limit (the ceiling) and the lower limit (the floor) are related to the net realizable value (defined above) in the following ways:

  1. _ Upper Limit or Ceiling for Market The upper limit, or ceiling, for the market amount is the net realizable value (NRV). In other words, the market amount cannot be higher than NRV. If the current replacement cost of an item in inventory is greater than NRV, the NRV is used as the market amount._
  2. _ Lower Limit or Floor for Market The lower limit, or floor, for the market amount is the net realizable value (NRV) minus the normal profit. In other words, the market amount cannot be lower than NRV minus the normal profit. If the current replacement cost of an item in inventory is less than the NRV minus the normal profit, the NRV minus the normal profit is used as the market amount._

Here’s a recap on how to determine the market amount used in the lower of cost or market rule:

  • If the current replacement cost is between the floor and the ceiling, the current replacement cost is the market amount.
  • If the current replacement cost is greater than the ceiling, the ceiling amount is the market amount.
  • If the current replacement cost is lower than the floor, the floor amount is the market amount."

_​_I would venture to guess though, that for our purposes it is enough to stick to S2000’s statement, namely that Market is essentially NRV.

#5

thx my friends , I’m very greatful for your help :slight_smile:

#6

My pleasure.