Lower of cost and net realizable value

Most US companies now test inventory using lower of cost and net realizable value, which replaced the more complicated lower of cost or market test for FIFO and average cost inventory in 2017. This guide explains when the test applies, how to calculate net realizable value, and works through an electronics retailer's year end.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. 3 minute read.

Short answer

Lower of cost and net realizable value is the US GAAP test for inventory measured using FIFO or average cost. Under ASC 330, as amended by ASU 2015-11, such inventory is written down when its net realizable value, the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation, falls below cost. Inventory measured using LIFO or the retail method still uses lower of cost or market. In this guide's example, an electronics retailer writes down inventory by $30,000.

At a glance

Applies to
FIFO and average cost inventory
Not for
LIFO and the retail method (LCM)
NRV
Selling price less completion, disposal, transport costs
Introduced by
ASU 2015-11
Write-down
New cost basis
Excel
Inventory costing comparison
Lower of cost and net realizable valueApplies to: FIFO and average cost inventory; Not for: LIFO and the retail method (LCM); NRV: Selling price less completion, disposal, transport costs; Introduced by: ASU 2015-11; Write-down: New cost basis; Excel: Inventory costing comparison.KEY FACTS AT A GLANCELower of cost and net realizable valueApplies toFIFO and average costinventoryNot forLIFO and the retailmethod (LCM)NRVSelling price lesscompletion, disposal,transport costsIntroduced byASU 2015-11Write-downNew cost basisExcelInventory costingcomparisonTax BakersLower of cost and net realizable valueApplies to: FIFO and average cost inventory; Not for: LIFO and the retail method (LCM); NRV: Selling price less completion, disposal, transport costs; Introduced by: ASU 2015-11; Write-down: New cost basis; Excel: Inventory costing comparison.KEY FACTS AT A GLANCELower of cost and net realizablevalueApplies toFIFO and average cost inventoryNot forLIFO and the retail method (LCM)NRVSelling price less completion, disposal,transport costsIntroduced byASU 2015-11Write-downNew cost basisExcelInventory costing comparisonTax Bakers
Key facts at a glance, as set out in this guide.

Which test applies: lower of cost and net realizable value or LCM?

Which inventory write-down test applies?Which inventory write-down test applies?Is the inventory measured usingLIFO or the retail method?YesLower of costor marketNoIs net realizable valuebelow cost?NoKeep at costYesWrite down to net realizable value
FIFO and average cost inventory use lower of cost and net realizable value.

ASU 2015-11 simplified the old lower of cost or market test, which compared cost with a "market" value bounded by a ceiling and a floor, for all inventory except LIFO and the retail method. The new test brought US GAAP closer to IFRS, which has always used lower of cost and net realizable value.

A worked example: an electronics retailer

Product lineCostExpected selling priceCosts to sell and shipNRVWrite-down
Laptops$120,000$150,000$6,000$144,000$0
Tablets$80,000$78,000$4,000$74,000$6,000
Older phone models$40,000$18,000$2,000$16,000$24,000
Cost and net realizable value ($)Cost and net realizable value ($)120,000144,000Laptops80,00074,000Tablets40,00016,000Older phone modelsCostNet realizable value
Where NRV is below cost, inventory is written down to NRV.

Laptops stay at cost: their NRV is higher, and the expected profit is not recognized until they are sold. Tablets are written down by $6,000 and the older phone models by $24,000, a total of $30,000, usually recognized in cost of goods sold.

How is net realizable value calculated?

Start with the estimated selling price in the ordinary course of business, using the best evidence at the balance sheet date, including price changes and sales after year end that confirm year-end conditions. Deduct reasonably predictable costs of completion, disposal and transportation, such as commissions, shipping and packaging. Normal profit margin is not deducted, unlike the floor in the old lower of cost or market test.

Item by item or in groups?

ASC 330 allows the test to be applied to individual items, to categories, or to total inventory, depending on which most clearly reflects periodic income, and the approach should be applied consistently. Testing in large groups can hide losses on individual product lines, so many companies test by product line or category.

What happens if prices recover?

A write-down at year end creates a new cost basis that is not written back up. Write-downs in an interim period may be recovered within the same fiscal year if prices recover. Under IFRS, write-downs are reversed when net realizable value recovers; see net realisable value under IAS 2.

What if a company uses both LIFO and FIFO?

Each part of the inventory follows the test for its own cost method: the LIFO portion uses lower of cost or market and the FIFO or average cost portion uses lower of cost and net realizable value. Many US groups use LIFO for domestic inventory and FIFO abroad, so they apply both tests.

What must be disclosed?

The basis of stating inventory, including the cost method; the amount of any significant write-downs, usually in cost of goods sold or separately if material; and the policy for estimating obsolete and slow-moving inventory.

How do companies estimate obsolete inventory?

Most use a reserve methodology based on inventory aging, sales history and planned discontinuations, adjusted for known items such as damaged goods. The reserve is part of the inventory carrying amount, not a separate liability, and should be checked against actual selling prices after year end.

See ASC 330 explained and LIFO explained, and test product lines in the NRV sheet of the Inventory costing comparison (Excel).

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Questions people ask

What is lower of cost and net realizable value?

The ASC 330 test for FIFO and average cost inventory: inventory is written down when its net realizable value falls below cost.

When does lower of cost or market still apply?

For inventory measured using LIFO or the retail inventory method.

What is net realizable value under ASC 330?

The estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.

Can inventory write-downs be reversed under US GAAP?

Not after year end; only interim write-downs can be recovered within the same fiscal year.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. FASB Accounting Standards Codification: Topic 330, Inventory
  2. Financial Accounting Standards Board

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

ASC 330ASC 330 inventory explainedASC 330LIFO explained, and why IFRS does not allow itIAS 2Net realisable value and inventory write-downs

More in ASC 330

TopicAll 3 guides in ASC 330

This guide is general information. It is not tax or legal advice for your situation.