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Inventory valuation adjustment (IVA)

The inventory valuation adjustment is made in the estimation of nonfarm proprietors' income to reflect the difference between the cost of inventory withdrawals as valued in the source data used to determine profits and the cost of withdrawals valued at replacement cost. It is needed because inventories as reported in the source data are often charged to cost of sales (that is, withdrawn) at their acquisition (historical) cost rather than at their replacement cost (the concept underlying the NIPAs). As prices change, companies that value inventory withdrawals at acquisition cost may realize profits or losses. Inventory profits, a capital-gains-like element in profits, result from an increase in inventory prices, and inventory losses, a capital-loss-like element in profits, result from a decrease in inventory prices. Inventory profits or losses equal the IVA with the sign reversed. No adjustment is needed to farm proprietors' income because inventories reported in the source data are measured on a current-market basis that approximates current replacement cost.