What Does Net Realizable Value (NRV) Mean?
The net realizable value (NRV) of assets is usually computed when the liquidation approach is being used to value a company. The liquidation approach is used when a company is no longer a going concern, and liquidating the assets would fetch a higher price than the present value of its future free cash flow. The first step in liquidating assets is to determine their NRV, which entails estimating the value the assets can fetch in an open market, less any related disposition costs.
Divestopedia Explains Net Realizable Value (NRV)
Computing the net realizable value of assets usually includes the following components:
- Marketable securities at present value minus disposition costs — this would include today’s value of any stocks, treasury bills and other investments, less broker commissions or early redemption penalties.
- Accounts receivable — the NRV of accounts receivable would be based on what is likely to be collected in the immediate future. If there are any bad debts or customers that may be in financial difficulty, then these receivables would not yield any value.
- Inventory at resale — there are essentially three kinds of inventory: raw materials, work in progress and finished goods. For raw materials and finished goods, the NRV would be the value expected to be realized minus selling costs of the inventory sold either individually or altogether. For work in progress, you need to determine if the inventory would yield a higher value as is, or after it is finished appreciating, that finishing it would likely mean some costs incurred.
- Prepaid expenses — these would be assumed as if realized into cash. For example, if there is insurance that has been prepaid for the year, the amount left for the year (say, six months) would be its cash value.
- Real estate — would be valued at the current market price net of selling costs, which would include commissions and legal expenses.
- Operating assets — equipment, furniture and fixtures would be assumed sold as is in an auction, either on a piecemeal or en bloc basis. The net book value of these assets is not generally representative of NRV that can be achieved, so taking them to the auction would be the only way to determine their real value.
- No value assets — assets on the balance sheet such as leasehold improvements and intangibles are not assigned any value under the liquidation approach.