For inventories measured using any method other than LIFO or the retail inventory method (RIM), ASC 330-10-35
establishes the lower of cost and net realizable value rule as the guiding principle for measuring inventories. For inventories measured using RIM, refer to IV 2
. For inventories measured using the LIFO cost flow assumption, refer to IV 3.8
defines “net realizable value” (NRV) as the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. Additionally, ASC 330-10-35-4
states that no loss should be recognized on inventories unless it is clear that a loss has been sustained.
In applying the lower of cost and NRV principle to raw materials and work-in-progress inventories, it is necessary to estimate the costs to convert those items into saleable finished goods in order to determine NRV. In determining the net amount to be realized on subsequent sales, selling costs should include only direct items, such as shipping costs and commissions on sales.
Determining NRV at the balance sheet date requires the application of professional judgment, and all available data, including changes in product prices that have occurred or are expected to occur subsequent to the balance sheet date, should be considered. For example, increases in prices subsequent to the balance sheet date but prior to issuance of the financial statements would likely demonstrate that the decline in prices at the balance sheet date was temporary, indicating that a lesser or no NRV allowance is required. However, a subsequent decrease in prices may indicate the need for an NRV adjustment at the balance sheet date. Thus, a decrease in selling price subsequent to the balance sheet date that is not the result of unusual circumstances, such as abrupt and significant but short-lived changes in supply and/or demand for the item, generally should be considered in determining NRV at the balance sheet date. See FSP 28.5.3
for additional details on recognized subsequent events for inventory.
Example IV 1-1 illustrates the impact of subsequent events on inventory valuation.
EXAMPLE IV 1-1
Assessing subsequent events for inventory valuation
During January 2020, Company A enters into a global restructuring program under which it will close certain facilities and discontinue certain product offerings. Most of the product offerings to be discontinued are currently profitable. The plan will be executed in phases beginning in October 20X0 and will continue for a period of two years. Each phase of the plan is subject to several levels of operational review and revision before ultimate approval by the CEO. Plans for product discontinuance may be revised significantly during review and may be rejected by the CEO. If products are discontinued, Company A will attempt to sell the inventory at salvage value or discard it.
The first phase is approved by the CEO in January 20X1 prior to the issuance of Company A’s calendar year-end financial statements.
Should the effect of the discontinuance be considered in the NRV assessment?
Yes. Although the products in question are profitable at the balance sheet date, all information related to inventory valuation should be taken into account through the issuance of the financial statements. Company A had a global reorganization plan in place prior to the balance sheet date. The fact that the phase of the plan in question was not approved until after the balance sheet date would not provide a basis to defer the loss. This is in contrast to when a specific event results in the loss of value of the inventory, such as due to a post balance sheet fire. In that case, (i.e., a clear triggering event occurring after the balance sheet date), the inventory would be impaired in the same period as the specific event occurred.