Net realisable value

Net realisable value is used to calculate the value of assets (usually stock) when cost of purchase cannot be used.

Net realisable value is the amount for which an asset can be sold minus the cost of selling it.

Net realisable value is most often used when the value of stock is less than the its historical cost (e.g. FIFO, LIFO, average cost, replacement cost, etc.). Then, in accordance with the accounting principle of prudence, the lower value must be used.

When an asset is re-valued at net realisable value, an unrealised loss has been made and this has to be shown in the P & L, as well as showing the reduced value of the asset in the balance sheet.

How much of an impact the cost of selling has on the value is likely to vary. Goods that are in a shop and waiting to be bought by customers do not require significant further expenditure. On the other hand, work in progress may not be saleable without passing it though the rest of the manufacturing process.

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