Difference between Net Realizable Value and Fair Value less cost to sell 14/09/13 23:09

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Difference between Net Realizable Value

and Fair Value less cost to sell Follow 516,488

Difference between Net Realizable Value (NRV) and Fair Value

less cost to sell of inventories
These two terms are similar on the surface, yet they are
technically different. IAS 2 specifically states that the net realisable
value for inventories may not equal fair value less costs to sell.
What is the difference? Please read on for answers.

IAS 2 Definitions
Net Realisable Value is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale.
Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.

Net realisable value refers to the net amount that a particular entity expects to realise from the
sale of an item of inventory in the ordinary course of doing its business. This value is that which
would likely result from the item being sold as part of regular day to day selling activities for
which the entity exists in the first place e.g. selling within a local market or community where
the entity regularly does business. This local market may not be the most advantageous
market to sell the item of inventory.

Fair value on the other hand refers to the price at which an orderly transaction to sell the same
inventory in the principal/most advantageous market for that inventory would take place
between market participants at the measurement date.

IAS 2 further clarifies that net realizable value is an entity-specific value while fair value is not.

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Difference between Net Realizable Value and Fair Value less cost to sell 14/09/13 23:09

This simply means that it is possible to have different values from the sale of the same item
depending on the circumstance under which it is sold.

0
COMMENTS

#2 Kriz David 2012-10-26 11:23 0

While I agree that at item could be sold at difference prices, there is no technical
difference betweent NRV and FV less cost to sell!
Within the context of IAS 2 and IAS 36 both mean the same thing for financial reporting
purpose and are both exit price. The distinction between entity specific and market
based price was introduced to reduce the subjectitivity in fair value measurement.
Quote

#1 Ben Ugwuede 2012-10-11 13:17 0

The explanations are technically correct but we may add a layman version as follows:

Net Realisable value is an accounting term that gives estimate of the worst case senario
of what an asset holder expects at any point under reference.
Fair value refers to what the asset holder expects under arm's length transactions. That
is transactions void of related party or other non-economic considerations.

Thank you.
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