net realizable value of inventory
Suppose you own a stack of slightly water-stained T-shirts. You think you can still sell them, but only at a discount, and you will have to pay for cleaning and a market stall to move them. The realistic cash you would actually pocket is the discounted price minus those selling costs — not the full price on the tag. That realistic, net-of-costs figure is net realizable value.
Net realizable value (NRV) is the estimated selling price of inventory in the ordinary course of business, minus the estimated costs to complete it and the costs to sell it. If the shirts would sell for 8 each but you would spend 2 each on cleaning and selling, their NRV is 8 − 2 = 6 each. NRV is the modern measure of 'market' value used to test inventory: under both IFRS and current US GAAP, inventory is carried at the lower of cost and net realizable value, so if cost exceeds NRV the inventory is written down to NRV.
It matters because it forces the books to reflect what goods can truly be turned into, not an optimistic sticker price. It is the everyday tool behind inventory write-downs for damaged, obsolete, or overpriced stock. Two cautions: NRV is an estimate that depends on judgment about future selling prices and costs, so it can be soft; and the same three letters NRV are also used for accounts receivable (there it means gross receivables minus the allowance for uncollectible accounts), so always check which asset is being discussed.
A shop holds shirts that cost 7 each. It can sell them for 8 but will spend 2 each on repackaging and selling, so net realizable value is 8 − 2 = 6. Since cost (7) exceeds NRV (6), each shirt is written down to 6, with the 1-per-shirt drop recorded as a loss.
NRV = expected selling price − costs to complete and sell; write down if cost is higher.
The same abbreviation NRV applies to receivables too, where it means gross receivables minus the allowance for doubtful accounts — a different calculation, so identify which asset is meant.