In one sentenceThe expected selling price of an item minus the costs of completion and sale; inventory is measured at the lower of cost and this value.
Simply put
The question here is: if I sold this item today, how much would I have left after selling costs? If it is less than its cost, its value in the books is overstated.
Under IAS 2 you write inventory down to net realizable value and record the difference as a loss in the same period. This usually happens with damaged or old items, or items whose price has fallen.
Worked example
An electronics store has 200 headphones at a cost of 80 SAR each; their market price is now 90 SAR, and the cost of selling them (commission and delivery) is 15 SAR.
Net realizable value per unit90 − 15 = 75 SAR
Cost per unit80 SAR
The lower of the two75 SAR
Write-down = (80 − 75) × 2001,000 SAR
Formula: Expected selling price − costs of completion and sale
Don't confuse it with
Inventory obsolescenceObsolescence is one cause of a fall in value, and net realizable value is the measure you use to calculate the fall.