Stock (inventories) and work in progress

Produced by Tolley

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Stock (inventories) and work in progress
  • Valuation of stock
  • Stock adjustments on cessation or transfer of trade
  • Stock transfers to a non-trader or a non-UK trader
  • Stock transfers to an unconnected UK trader
  • Stock transfers between connected UK traders
  • Connected party transfers and transfer pricing
  • Stock transfers between connected UK traders ― sale basis of valuation elections
  • Stock adjustments ― summary
  • Appropriations from trading stock
  • More...

Valuation of stock

Stock can give rise to a profit or loss in a variety of situations, such as sale, appropriations by business-owners, changes in value or obsolescence. It is therefore important that stock is valued as accurately as possible to ensure the correct amount is assessed for tax purposes. GAAP provides the starting point.

FRS 102, s 13 ‘Inventories’ (the term used to describe stock) sets out the definition of inventories and the basis of valuation required under UK GAAP. The IAS equivalent is IAS 2 ‘Inventories’. The principle under IAS is essentially the same as under FRS 102.

Under FRS 102, inventories should be valued at the lower of cost and the estimated selling price, less completion and selling costs. Where inventories are held for distribution for nominal or no consideration, they shall be measured at cost, adjusted where applicable for any loss of service potential.

Micro-entities are permitted to use FRS 105 rather than FRS 102, which allows for more simplified financial statements.

Stock is generally valued at the end of an accounting period at the lower of cost or ‘net realisable value’ (NRV) for tax purposes.

Cost is normally determined on a ‘first in / first out basis’ (FIFO), which means the older stock is always deemed to be sold first, which leaves the newer stock in hand at the year-end.

Whilst ‘last in / first out’ (LIFO) is also an accepted accounting basis for valuing stock, it is not acceptable for tax purposes.

The NRV is determined by taking the sales price less the costs to completion. Normally, NRV will be higher than cost, but in some cases, it may produce a lower figure which must be used.

Stock may also be valued on the market to market basis (at market value), which is the only other method accepted by HMRC. However, this only tends to be used by financial institutions and commodity dealers. It is typically only appropriate where there is a liquid market in the

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