A business owner asks for inventory to be “updated to market price,” assuming that the newest number must be the most accurate. Yet a price does not become an accounting basis simply because it is recent. First establish what is being measured: an amount the business expects to recover from its own sales, an exit price between market participants, or a cost already incurred. These questions can produce different amounts for the same asset.
For ordinary inventory subject to IAS 2's general rule, the comparison is between cost and net realisable value. IFRS 13 provides a fair-value framework when another standard requires or permits that basis. It is not general permission to revalue all merchandise whenever a new price appears. Identifying the applicable standard comes before obtaining quotations or commissioning a valuation.
Compare the questions before comparing the terminology
| Dimension | Net realisable value | Fair value |
|---|---|---|
| Main question | What net amount is expected from ordinary sales? | What is the exit price in an orderly transaction between market participants? |
| Perspective | The entity's circumstances and necessary completion and selling costs | Market-participant assumptions at the measurement date |
| Role for ordinary inventory | Comparison with cost under IAS 2 | Not an automatic replacement for IAS 2's rule |
This comparison does not create a menu from which management can select the highest number. Each basis serves a purpose. A supplier's quotation for newly purchased goods is also not necessarily evidence of the selling price for existing inventory, particularly when condition, quantity or transaction terms differ.
Three numbers for one batch
In an educational example, a business holds 300 units costing SAR 80 each. It expects to sell each unit for SAR 92, with SAR 7 of necessary completion and selling costs. Net recovery is SAR 85, so the relevant comparison is cost of SAR 80 against net realisable value of SAR 85. Under these assumptions, the batch remains at SAR 24,000. The business does not recognise SAR 1,500 profit merely because estimated recovery exceeds cost.
A wholesale buyer also offers SAR 78 per unit. Its existence does not automatically invalidate the ordinary-sales estimate, nor establish a confirmed fair value. Examine whether the offer can be executed, the goods' condition, the transaction market, quantity and whether circumstances are orderly. It may be useful evidence, but evidence needs interpretation before becoming a measurement conclusion.
If the expected ordinary selling price falls to SAR 82 while necessary costs remain SAR 7, net realisable value becomes SAR 75. The batch then measures SAR 22,500 in this example, a SAR 1,500 reduction. What changed was expected recovery under the relevant basis, not management's preference for a more attractive description of price.
Keep different evidence from being mixed together
Label each price clearly: purchase or sale, unit or bundle, quantity, condition and date. Identify costs omitted from the quotation and explain why the assumptions fit the inventory under review. This avoids comparing a retail price including services with a wholesale offer that excludes transport.
Keep recorded cost, price evidence and calculation adjustments separate in the working paper. Do not overwrite the cost field with a market quotation and later try to reconstruct the original amount. Retaining the trail allows independent recalculation and reveals whether differences arise from price, quantity or overlooked selling costs.
When an external report refers to “fair value,” understand its purpose and assumptions before transferring the result into the ledger. It may have been prepared for a different purpose from measuring this inventory under the applicable policy. The issue is not necessarily the valuer's competence, but using a valid answer for a question it was not designed to address.
A sound accounting conclusion can begin with a simple explanation: this is the required measurement basis, this is the relevant evidence, and this is its effect on the balance. Numbers then help explain inventory instead of becoming a competition between similar-sounding terms that measure different things.
Sources & further reading
Visit the original source to explore the concept and its wider context.
General educational content. Appropriate treatment depends on your business and accounting policies; consult your accounting professional when applying it to business records.
