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Stock: Cost vs NRV

Is it possible for Cost vs NRV to still be too high?

• ICAEW Practice Certificate

I have a friend who has asked me a simple question regarding stock in his small company accounts.

When valuing his stock, he values it at cost since this is always lower than NRV - easy!

However, some of his stock is slightly out-dated (i.e. they're not the latest releases of the goods he sells). For example, he bought some stock for £20 each, and he can certainly sell it for more than £20. However, none of the distributors he buys from would sell it for £20 now. To purchase the same item, he would probably only need to pay £10 for it now. He seems to think that holding the stock in his accounts at £20 each seems inflated, when the cost price would only be £10 if you actually bought it from the same source today. Is there an argument for writing down stock based on current list prices for identical stock lines? Is there ever a time when using the Cost vs NRV model actually gives too high a value?

My instinct is that holding it at £20 is correct, because FRS 102 seems pretty clear, and doesn't give much alternative in this simple scenario. The closest I can see is FRS102 para 13.16, which states that you can use "most recent purchase price" for valuing stock. However, this wouldn't apply in this situation since he hasn't actually bought this line of stock recently, he can just observe from public list prices that if he were to purchase it now, it would be less.

Any thoughts would be helpful.

Thanks

Alex

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By DJKL
26th Mar 2019 10:05

Surely has to be cost or NRV despite his reservations.

Would he be prepared to increase the "carrying cost" of stock he holds if the wholesaler put up prices and accordingly would he willingly pay tax on unrealised profits? Thought not.

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By andy.partridge
26th Mar 2019 10:17

He thinks he can sell for more than £20 but hasn't.

He thinks that price is still competetive when later releases are on the market and the cost price of his model has halved.

Then why is it *still* on the shelves of the warehouse?

Rather than trying to circumnavigate FRS102, isn't the solution an honest appraisal of NRV?

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By Cheshire
26th Mar 2019 11:01

You say '' he can certainly sell it for more than £20''

Where does that certainty come from?

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26th Mar 2019 13:01

I'm guessing the certainty comes from the fact there is an identifiable market in whatever he sells (I'm also guessing the friend is an internet re-seller or something of that ilk).

Bottom line, though, is that if a profit is still generated using a stock valuation @ cost of £20/unit, then that £20 is still the lower of cost and NRV. It's completely irrelevant that he could now buy the same item for £10, all that means is that he will realise less profit on eventual sale than he had originally anticipated.

And as DJKL has pointed out, the corollary of the friend's argument would be early taxation of unrealised profits. You can't have it both ways.

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By lionofludesch
26th Mar 2019 13:04

It's lower of cost and NRV. NRV is more than cost and cost is £20.

If it were lowest of cost, NRV and what-he-could-have-bought-it-for-if-he'd-been-smarter, £10 a unit might have been in the frame.

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By WhichTyler
26th Mar 2019 13:18

He should spend less time arguing about stock valuation principles and get with selling the stock he has so he can restock at new lower price and enjoy fatter margins... (assuming everything he has told you is true

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By lionofludesch
26th Mar 2019 13:22

Is stock-taking not a big enough chore without trawling tinterweb to see what you could have bought stuff at ?

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By Duggimon
26th Mar 2019 14:53

The point of stock/NRV valuation is that if he makes a profit, the cost to him goes in to the P&L at the same time as his income, but if he can't realise the cost, he gets the benefit of the loss before needing to make a sale.

Your value of £10 is irrelevant to either situation because it's not what he paid.

You could further point out that were he to devalue stock to £10 per item, then sell them as normal, the net effect would be the same as leaving them at £20, you'd have a £10 loss on the stock set against £10 more profit.

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By paulwakefield1
27th Mar 2019 08:56

Now if they reintroduced SSAP16..............

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By DJKL
27th Mar 2019 09:29

Do not remind me, it was a hot topic in academic circles in 1984 when I did my PG Cert; I seemed to spent half a term looking at and comparing possible variant approaches within "Accounting in an Inflationary Environment"-Scapens, and various back articles in TAM and Accountancy- it was probably only two weeks but it really felt like half a term.

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By lionofludesch
27th Mar 2019 09:34

Nobody made a profit as they were too busy doing their current cost accounts to do some real work.

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By Ian Bee
27th Mar 2019 11:27

Mention of SSAP16 brings memories back to those of us getting on in years. I spent ages getting on top of it for PEII in the early 1980s, never actually having to draw up inflation accounts in practice, and it was withdrawn soon after I qualified.

Might have been good practice though as I moved into tax and had to deal with all sorts of unintelligible nonsense that still comes out in every Finance Act.

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