Difference between Net Realizable Value (NRV) and Fair Value

CFA Level I FRA
#1

Was trying to understand the whole impairment thing in Long Lived assets;

  1. So is NRV = Fair Value - Selling Costs

  2. Is the Value in Use (IFRS) the PV of discounted or undiscounted cashflows?

  3. What is the difference between Revaluation Model and Impairment (LOS 30g. vs LOS 30h.)

Thank you!

#2

  1. NRV = Fair value (i.e., selling price) – selling costs _ – costs to complete _ (think: work-in-process inventory)

  2. Discounted.

  3. (I think you meant “3.”) Not clear from the SchweserNotes. I’ll try to dig a bit more.

#3

S200magician :

Do you have any conclusion regarding the differences between " revaluation" and " impairment" under IFRS? It seems to me that they are quite similar in nature but the treatments of the reversal (of the value) are different, why ?

Your clarification will be highly appreciated !

#4

s2000magician, can you help explain the difference between NRV and market? Just trying to solidify the differences in inventory accounting under IFRS and GAAP.

Thanks.

#5

NRV is selling price less any costs to sell or costs to make it ready to sell (think: work-in-process).

Market price usually means replacement cost.

Under US GAAP, you use market price, but no higher than NRV, and no lower than NRV less a normal profit. On the exam they’ll give you all three numbers; put them in order smallest-to-largest and pick the one in the middle.

#6

just to be clear here: you are talking about measurement of inventory not long lived assets?

#7

Hi guys,

for the measurement of PP&E:

  • IFRS: cost model or revaluation model --> the revaluation model uses the fair value of PP&E. There must be an active market for the fixed asset.

  • US GAAP: only the cost model is allowed.

Impairment is when:

  • IFRS: the carrying value of the asset is > recoverable amount which is the max(NRV; value in use, meaning the PV of future CFs)

  • US GAAP: the carrying value of the asset is > sum of the future undiscounted CFs.

for the measurement of inventories:

  • IFRS: inventories are reported at the lower of cost or NRV, which equals the fair value - the cost to realize the sale. Thus fair value is the amount that you will get in an arm’s length transaction without deducting the costs of sale.

PP&E, inventories, measurement methods and impairment are different things. Make sure you don’t confuse. Hope that helps.

#8

Would you please advise where in the CFAI curriculum I can find the condition that there must be “an active market” for the long-lived assets if revaluation model is chosen ?

#9

S2000magician, do you have input on this post?

I’m forcing myself to remember this part in all of the calculations, but the logic behind interest expense still isn’t making sense.

Is the rationale behind this that the employee is earning interest (equal to the discount rate) on contributions that the employer is making? So I guess the employer is trying to offset these interest expenses with investment returns of their own (which are hopefully greater than the discount rate)?

Can someone tell me if I’m on track here?

Thanks!