BCZ37 IAS 2 Inventories defines net realisable value as:

‘... the estimated selling price in the ordinary course of business … less the estimated costs necessary to make the sale...’

BCZ38 For the purpose of determining recoverable amount, IASC decided not to use the term ‘net realisable value’ as defined in IAS 2 because:

(a) IAS 2’s definition of net realisable value does not refer explicitly to transactions carried out on an arm’s length basis.

(b) net realisable value refers to an estimated selling price in the ordinary course of business. In certain cases, net selling price will reflect a forced sale, if management is compelled to sell immediately.

(c) it is important that net selling price uses, as a starting point, a selling price agreed between knowledgeable, willing buyers and sellers. This is not explicitly mentioned in the definition of net realisable value.

BCZ39 In most cases, net selling price and net realisable value will be similar. However, IASC did not believe that it was necessary to change the definition of net realisable value used in IAS 2 because, for inventories, the definition of net realisable value is well understood and seems to work satisfactorily.