lowerofcostandnetrealizablevalue

Lower of cost and net realizable value (LCNRV) is an inventory valuation method used to prevent overstating assets on the balance sheet. Under IFRS, inventories are carried at the lower of their cost and their net realizable value. Net realizable value is the estimated selling price in the ordinary course of business minus estimated costs of completion and disposal. If the cost of an item exceeds its NRV, the inventory is written down to NRV, and the loss is recognized in profit or loss. Reversals of prior write-downs are allowed under IFRS if NRV increases, but only up to the original cost.

Under US generally accepted accounting principles (GAAP), inventory may be measured at the lower of cost and market (LCM). Market is generally defined as current replacement cost, with upper and lower limits: not higher than NRV (the ceiling) and not lower than NRV minus a normal profit margin (the floor). Any write-down to market reduces earnings and is not reversed under US GAAP.

Application of LCNRV or LCM affects all types of inventory, including raw materials, work in process, and finished goods. The method chosen can influence reported profits and asset values, particularly during periods of declining prices or rising costs. Disclosures typically describe the accounting policy, the measurement basis used, and the amount of any write-downs or reversals, helping users compare financial statements across periods and with other entities.