The stock of a trade can be anything acquired with a view to reselling at a profit. The term ‘inventory’ is sometimes used as an alternative to the term ‘stock’ in accounts prepared in accordance with GAAP. The two terms are equivalent and interchangeable. In accounts prepared in accordance with UK GAAP (BIM31000) inventory (or stock) should be classified as: raw materials and consumables, work in progress (BIM33020), finished goods and goods for resale, payments on account. The guidance in this

A provision made in accounts is the recognition of a liability, the timing or amount of which is uncertain. Provisions are distinguished from trade payables and accruals and are reported separately in accounts. The word ‘provision’ is also often used to refer to the recognition of a reduction in the carrying amount of an asset, for example, a debt impairment provision or an inventory (stock) provision. The rules governing such ‘provisions’, both in accountancy practice and tax law, are differen

The guidance in this chapter includes not only information on the acceptable valuation bases but also some descriptive paragraphs to give a feel for the important factors in a stock valuation. Stock valuation can never be absolutely precise, with a number of practical considerations affecting the accuracy of the estimate. GAAP provides the starting point for stock valuation for tax purposes, but you should note that it does not always prohibit methods such as last in first out (LIFO) for costing

The basis may be invalid because it does not follow generally accepted accounting practice or because it pays so little attention to the facts that it is not reflecting cost or net realisable value. In the accounting period when the basis of stock valuation is changed from an invalid basis to a valid basis both the opening stock valuation and the closing stock valuation must be computed on the new valid basis. Where it is possible to re-open or amend earlier years (using discovery powers) the op

When a business ceases to trade, it may still have trading stock which needs to be sold. If the trading stock is valued in accordance with the tax legislation and included in the profit and loss account in the final period of account, any amount received for the transfer of the stock is not a post-cessation receipt. This is because the value of the trading stock has already been included in calculating the taxable profits of the trade to cessation. The rules on valuation of stock on cessation ar

lief for the expected loss may be obtained in the period for which the accounts are being prepared by valuing the stock at what it is expected to realise when sold in the normal course of trade. For tax purposes we are looking for a figure (commonly referred to as a valuation) which represents the cost, or, if lower, the net realisable value of the stock. In some circumstances there may be more than one acceptable method of computing the value of stock but the basis of valuation in a particular

uing stock for tax purposes. This decision was not upheld by the Courts in Canada and came on appeal to the Privy Council. Viscount Simonds said: The income tax law of Canada, as of the United Kingdom, is built upon the foundations described by Lord Clyde in Whimster & Co v CIR [1925] 12TC813, in a passage cited by the Chief Justice which may be here repeated. “In the first place, the profits of any particular year or accounting period must be taken to consist of the difference between the recei

Part 2 Income tax, corporation tax and capital gains tax_general Other business and investment measures Trade profits: changes in trading stock 37 1 Schedule 15 contains provision about the effect of certain changes in trading stock on the calculation of profits of trades for the purposes of income tax or corporation tax. 2 The amendments made by that Schedule have effect in relation to changes in trading stock occurring on or after 12 March 2008. 3 In subsection (2) “ change in trading stock ”

There are two acceptable valuation bases for stock and work in progress as follows: the lower of cost or net realisable value (CIR v Cock Russell & Co Ltd [1949] 29TC387), see BIM33135, mark to market, see BIM33160. ‘Net realisable value’ is a term used in old UK GAAP and IAS. FRS 102 and FRS 105 use the equivalent term ‘estimated selling price less costs to complete’. All other bases are not acceptable for tax purposes. Construction contracts are valued on a basis that brings in a profit/loss e

All bases of stock valuation other than the lower of cost and net realisable value and mark to market are not acceptable for the purposes of Income Tax or Corporation Tax on trade profits. The notional replacement cost method (that is, a notional price at which the trader would have to buy stock in order to realise the normal rate of profit), BSC Footwear Ltd v Ridgeway [1971] 47 TC 495 is not acceptable but see BIM33135 for a description of an acceptable replacement cost method. Following Patri

FRS 102 Section 27 Impairment of Assets Paragraph 27.2 states that an entity shall assess at each reporting date wither any inventories (stocks) are impaired by comparing the estimated selling price less costs to complete to the current carrying amount. If inventory is impaired, the entity shall reduce the carrying amount of the inventory to its selling price less costs to complete and sell. This will typically involve the entity booking a stock provision. The calculation of a stock provision re

Provisions and write downs arrived at using formulae, including age related formulae, are acceptable provided that each formula reflects a realistic appraisal of the future income from the particular category of stock and results in the stock being included at a reasonable estimate of its net realisable value. Pinpoint accuracy cannot be achieved but the assumptions made should be realistic. After reviewing the position in a particular case an Inspector may agree that certain formulae are approp