when inventory is measured as the lower of cost or net realizable value it is embracing the accounting principle of conservatism though nrv may be the most dramatically reduced valuation for inventory carrying costs and transactional costs of goods are taken into account to not overstate the income statement and accurately represent the goods value to the business 
another advantage of nrv is its applicability as the valuation method can often be used across a wide range of inventory items often a company will assess a different nrv for each product line then aggregate the totals to arrive at a company wide valuation there are several glaring disadvantages to using nrv however first the approach requires substantial assumptions from management about the future of the product for goods clouded with uncertainty it may be nearly impossible to predict obsolescence product defects customer returns pricing changes or regulation for this reason nrv assumptions may lead to incorrect valuations application and analysis of nrv may also be complicated different companies may be exposed to different risks and business impacts that are factored into nrv calculations differently for example certain industries may necessitate dealing with customers that have riskier credit profiles thus forcing the company to experience larger write off allowances embraces conservatism to not overstate a company s financial statementmore accurately the future economic benefits of certain situationscan be used across individual inventory items then aggregatedrequires substantial assumptions from management that may never actually materializetakes time to calculate different options then select the lower of cost of or nrvmay reduce the comparability of the financial statements for different companies if nrv calculations widely varyexample of net realizable valueas part of its 2021 annual report public filing volkswagen disclosed ownership of 43 7 billion of inventory a very slight decline from the 43 8 billion of inventory carried at the end of december 2020 3as part of this filing volkswagen disclosed the nature of the calculation of its inventory in compliance with prevailing accounting regulation volkswagen considered net realizable value when determining its inventory value 4other companies may be a little more transparent in how they use nrv in determining their inventory level as part of its 2021 annual report shell reported 25 3 billion of inventory up more than 25 from the year prior the company states that as part of its calculation of inventory the company wrote down 592 million shell also indicated a similar write down to nrv occurred in 2020 5