Mastering Inventory Valuation with IAS 2: Understanding Net Realisable Value (NRV)

Accurately valuing your inventory is crucial for financial transparency and ensuring your financial statements truly reflect your business’s economic reality. Under IAS 2, inventories must be measured at the lower of their cost and net realisable value (NRV). This key principle ensures that your inventory is not overstated, protecting your business from potential losses due to damage, obsolescence, or declining market prices. Why is NRV Important? Because it directly impacts your profitability and financial health. Correctly applying NRV helps you provide a clear and accurate view of your business’s financial position to stakeholders. Here’s what you need to know:

1️⃣ NRV Calculation: NRV is the estimated selling price in the ordinary course of business, minus the costs of completion and the expenses necessary to make the sale. This conservative approach ensures your inventory is not overvalued.

2️⃣ Adjusting for NRV: Inventory should be written down to NRV if its value falls below cost due to factors like damage, obsolescence, or a drop in selling prices. This protects your financial statements from overstating asset values.

3️⃣ NRV vs. Fair Value: Unlike fair value, which is market-based, NRV is entity-specific and considers what you can actually realize from your inventory after all costs are accounted for.

4️⃣ Post-Reporting Period Events: Recent selling prices after the reporting date can adjust NRV, ensuring that your inventory valuation reflects the most current market conditions.

5️⃣ Reversing Write-Downs: If the NRV increases in subsequent periods, you can reverse previous write-downs, up to the amount originally written down. This flexibility ensures that your financial statements are always accurate and up-to-date. 💡 Pro Tip: Regularly review and update your inventory valuation policies to align with market conditions and ensure compliance with IAS 2. This not only enhances financial accuracy but also builds trust with stakeholders. Ready to optimize your inventory valuation? Let’s connect and explore how mastering NRV under IAS 2 can elevate your financial reporting and business success!