Unusual Stock Valuation

Unusual Stock Valuation

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Our business is a service company that have had to buy two years worth of inventory to support products that are end of life with the manufacturer but still need to be supported with customers for the next two to three years.

Our inventory is currently valued on a 3 and 6 month usage profile with write downs of excess stock monthly against these usage profiles per stock item. I can't see anything in SSAP 9 for the valuation of stock that will not be utilised for at least a year. If I brought the items into the current profiles then we would have large cost of sale adjustments, but this stock is not yet in use so does not affect current revenue!

I could value at straight cost but net realisable value could drop dramatically in the next eighteen months.

Would it be prudent to hold the unused stock at cost and review every six months and write down accordingly.

Does anyone have any ideas/suggestions or experience on this unusual valuation problem, seeing as there is no planned usage and no future written down value for this stock at the present time.

Outside of extrapolating usage by seasonal analysis/trends, I'm not aware of any standards/regulations for such cases.

All ideas welcome.
Paul James

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By neileg
11th Feb 2003 09:46

Mmm...
I think your problems arise out of the algorithm you have used for valuation. There is an inconsistency between how you arrive at the value of your stock, and the reason you have purchased the stock for your obsolete product.

Valuing on a 3 to 6 month usage cycle is fine for fast moving stock. However, you have a particular business case for buying the obsolete stock that does not fit into normal useage patterns. I suggest that you adopt a different valuation model.

There's no reason why you can't apply SSAP9 priciples to this problem, even though the specific case may not be covered in the standard.

Some obvious points:
1) if the stock hasn't been used by the time the support for the obsolete products ceases, it's value is scrap only. So you could consider reviewing the value of the stock and write it down progressively to zero over, say, 3 years.
2) What are you going to charge the customer for the parts if they are used? This gives you a realiseable value that I assume exceeds cost. You could attach a probability to the use of that part over the next three years and derive an expected value. Use that as a valuation.
3) The value to the business of the stock may be unrelated to its cost. The value in use relates to the value of the contract that this stock supports.

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By AnonymousUser
13th Feb 2003 11:27

Thanks Neil
You've hit the nail on the head with the obvious points. Because the stock in question is going to be as rare as hen's teeth in the next two year period, we can obviously charge a premium price as time goes on and supply is restricted.

It obviously raises many questions and throws a few curve balls but I'm glad I don't appear to be missing any straight forward principle..

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