How Changes to Accounting Reserves Affect NOLVs

Lenders often inquire as to how accounting reserves might affect recovery values. This is an important consideration, as Net Orderly Liquidation Values (NOLVs) are predicated on the eligible inventory amounts used by the valuation firm.

Recovery rates are based on the gross dollars per a company’s perpetual inventory system. The NOLV dollars are based on recovery rates that are expected to be realized based on the gross inventory perpetual file. Any application of accounting reserves is applied after recovery rates are derived and finalized. This application, post recovery rates, yields a reduction to eligible inventory, or starting point, to which the net recoverable dollars are applied and, therefore, favorably affects the NOLV percentage rate.

However, application of such accounting reserves results in no change to the NOLV dollars that are expected to be realized in the event of a Sale. An example has been provided below for illustrative purposes.

As illustrated above, the handling of this reserve is an important consideration and should be understood fully at the onset of a valuation engagement. The NOLV percentage applied for lending calculations must be consistent with the parameters used for valuation purposes by the valuation firm. Exposure to lenders on this particular issue results when a valuation firm has factored such accounting reserves into the NOLV calculation, while the collateral amounts provided by the prospective client are gross of such reserves. This leads to an over-advanced position based on the provided NOLVs.

For more information contact:
Dean W. Hogancamp, CFA
Inventory Appraiser
Hilco Valuation Services
dhogencamp@hilcoglobal.com