Lower of Cost or Net Realizable Value Rule for Inventory

Inventory is presented on the Balance Sheet at the lower of cost or net realizable value, where the net realizable value is the expected selling price minus any costs to complete the sale. If a company's net realizable value decreases such that it is lower than the inventory's cost, the company should take an inventory writedown for the amount of the difference.

International Financial Reporting Standards (IFRS) require all companies to use the lower-of-cost-or-net-realizable-value rule. U.S. GAAP also has the lower-of-cost-or-net-realizable-value rule, but companies using LIFO or the retail inventory method use the lower-of-cost-or-market rule instead.
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