NRV vs. Fair Value: Which One Is Better?

TL;DR: Net Realizable Value focuses on conservative, realizable asset values after costs, while Fair Value reflects current market pricing. NRV suits inventory and receivables; Fair Value suits market-driven assets.

The valuation of raw materials, finished goods, and accounts receivable plays a critical role in financial decision-making for manufacturing businesses. Two commonly used approaches are Net Realizable Value (NRV) and Fair Value. While both aim to represent asset value accurately, they serve different purposes and suit different accounting scenarios.

Understanding Net Realizable Value (NRV)

Net Realizable Value is the amount you expect to receive from selling an asset after deducting all selling and completion costs. It is commonly used to avoid overstating asset values in financial statements.

NRV in Inventory

Manufacturers use NRV to estimate realistic inventory values when items are damaged, obsolete, or slow-moving.

• Helps reflect true profitability by avoiding inflated stock values.

• Highlights process or storage issues that reduce inventory value.

• Improves decision-making around write-downs and clearance.

Lower of Cost and NRV

Under this principle, inventory is recorded at the lower of its original cost or its NRV.

Example: Finished goods costing Rs. 10,000 but sellable at Rs. 9,000 are recorded at Rs. 9,000.

NRV in Accounts Receivable

NRV estimates how much cash you realistically expect to collect from customers.

Example:

• Total receivable: Rs. 50,000

• Doubtful amount: Rs. 10,000

• NRV: Rs. 40,000

NRV Calculation

NRV = Expected selling price − Selling and completion costs

Examples:

• Inventory: Selling price Rs. 5,000 − Costs Rs. 1,500 = NRV Rs. 3,500

• Receivables: Owed Rs. 10,000 − Doubtful Rs. 2,000 = NRV Rs. 8,000

Understanding Fair Value

Fair Value represents the price at which an asset can be sold in the open market between informed and willing parties. It reflects current market conditions rather than conservative realizability.

Fair Value is widely used in financial reporting, stock valuation, and asset revaluation.

Fair Market Value

Fair market value estimates are based on:

• Market comparisons

• Income generation potential

• Replacement or reproduction costs

Fair Value in Inventory

Fair Value reflects what inventory could fetch today in the market. Unlike NRV, it fluctuates with demand, pricing trends, and economic conditions.

Fair Value of Accounts Receivable

This represents what a third party might pay to acquire your receivables today, discounted for risk and time value of money.

Fair Value Calculation

Fair Value = Price × {1 + r × (x/360)} − Revenue or dividends

Example:

• Asset price: Rs. 10,00,000

• Interest rate: 8%

• Time: 60 days

• Revenue: Rs. 20,000

• Fair Value ≈ Rs. 10,03,333

NRV vs. Fair Value: Key Differences

Which Method Is Better?

NRV is better for conservative financial reporting and long-term planning. Fair Value is better for real-time market decisions, investments, and asset comparisons. The right choice depends on asset type and reporting intent.

FAQs

What is the difference between NRV and Fair Value?

NRV subtracts selling costs to show realizable value, while Fair Value reflects the current market price.

How do you calculate NRV of inventory?

NRV equals expected selling price minus selling and completion costs.

When should NRV be used instead of Fair Value?

When valuing inventory or receivables conservatively to avoid overstating assets.

What is the formula for Fair Value?

Fair Value = Price × {1 + r × (x/360)} − dividends or revenue.

How does the lower of cost and NRV principle work?

Assets are recorded at the lower of original cost or realizable value to reflect realistic financial position.

What is NRV in accounts receivable?

It is the amount you realistically expect to collect from customers.