NRV of development properties

Real estate development spans multi-year cycles, so carrying land and units above what the current market will pay overstates assets and defers loss recognition into a later, potentially worse period; disciplined project-level NRV testing is a key indicator of reporting quality and an area regulators scrutinize closely during downturns.

Is NRV being tested at the project or distinguishable unit-type level, rather than blended across the whole company? Are current achievable selling prices (recent transactions, active price lists) used, rather than aspirational or original feasibility-study prices? Do remaining costs to complete and estimated selling costs get fully deducted in arriving at NRV? Are completed units unsold for an extended period specifically reviewed as a signal that a write-down may be needed, and are prior write-downs reversed (capped at original cost) when conditions improve?

1) Define the unit of account for testing: normally each project (or, within a large project, each distinguishable unit type/phase) rather than the whole company, since netting strong projects against weak ones masks impairment. 2) Compare the carrying cost of land/inventory allocated to that project or unit type against its estimated selling price based on current market evidence (recent transactions, signed sales, active price lists), not aspirational or historical prices. 3) Deduct from that estimated selling price all remaining costs to complete construction and all estimated costs necessary to make the sale (marketing, sales commissions, closing costs) to arrive at net realizable value (NRV). 4) Where carrying cost exceeds NRV, recognize a write-down (impairment) to NRV immediately in profit or loss; where a previous write-down's circumstances no longer apply (prices recover, costs to complete fall), reverse the write-down but only up to the original cost (never above). 5) Repeat the test at each reporting date, refreshing price evidence and cost-to-complete estimates, and specifically review completed units that have remained unsold for an extended period as a signal that a write-down may be needed.

Measurement base: inventories (development properties) are measured at the lower of cost and net realizable value; NRV is the estimated selling price in the ordinary course of business less estimated costs to complete and estimated costs necessary to make the sale, assessed at the level of each project or distinguishable unit type. Subsequent measurement: reassess NRV at every reporting date; if NRV recovers above a previously written-down carrying amount, reverse the write-down but limit the reversal so the new carrying amount does not exceed original cost; write-downs and reversals are both recognized in profit or loss, typically within cost of sales or as a separate impairment line.

Disclose the amount of inventory write-downs recognized in the period and the line item in which they are included; disclose the amount of any reversal of previous write-downs and the circumstances that led to the reversal; disclose the basis used to determine NRV (recent transactions, committed sales) especially where market evidence is thin; disclose the carrying amount of inventories carried at NRV versus cost; disclose aged/slow-moving completed unsold inventory where material to understanding risk.

• Testing NRV at the whole-company level, netting strong projects against weak ones and masking a write-down that should be recognized on a specific project
• using aspirational relaunch or original feasibility-study prices rather than current achievable prices supported by recent transactions or committed sales
• ignoring completed units that have remained unsold for years, which is itself an indicator that current market price (not original budget) should drive the NRV test
• omitting remaining costs to complete or selling costs from the NRV deduction, overstating NRV
• reversing write-downs above the original cost, or failing to reverse them at all when market conditions genuinely improve.