BIM33130 - Stock: valuation: a brief summary of SSAP9
PART 1
PARAGRAPH 1 explains that stocks are valued at the end of the
accounting period to identify and carry forward those costs which
were incurred before that date but which will not give rise to
income until a later period; that stock is valued ’at cost,
or if lower at net realisable value' and that net realisable value
is appropriate only where ’there is no reasonable expectation
of sufficient future revenue to cover cost incurred, for example,
as a result of deterioration, obsolescence or change in demand'.
PARAGRAPH 2 recognises that although strictly stocks should
be considered item by item this is impracticable in some instances.
In that event: ’groups or categories of stock items which are
similar will need to be taken together.
PARAGRAPH 5 explains how to arrive at net realisable value.
PARAGRAPH 15 refers to Appendix 1 for some general guidelines
to help determine net realisable value and to identify those
situations in which net realisable value is likely to be less than
cost.
PART 2
PARAGRAPH 21 defines net realisable value.
APPENDIX 1
PARAGRAPH 16 gives clear authority for the use of formulae ’based on predetermined criteria' to calculate the provisions to reduce stock from cost to net realisable value and for those formulae to take account of, as appropriate:
i. the age,
ii. movements during the past,
iii. expected future movements,
iv. estimated scrap values,
of the stock in question.
But that paragraph limits the use of formulae in two
ways:
- Formulae are intended only as an ’initial calculation'.
That clearly implies that they are not seen as necessarily
producing a definitive answer; and
- ’it is still necessary for the results to be reviewed in the light of any special circumstances which cannot be anticipated in the formulae, such as changes in the state of the order book'.
PARAGRAPH 18 amplifies paragraph 16 in relation to stocks of spares held for sale by identifying the special factors that need to be considered, that is:
- the number of units sold to which they are applicable,
- the estimated frequency with which a replacement spare is
required,
- the expected useful life of the unit to which they are applicable.
PARAGRAPH 19 extends the information that should be taken into
account in considering net realisable value to that available at
the date of completion of the financial statements. Note that it
contains the advice that ’no reduction falls to be made when
the realisable value of material stocks is less than the purchase
price, provided that the goods in which the materials are to be
incorporation can still be sold at a profit after incorporating in
the materials the cost price'.
PARAGRAPH 20 sets out the ’principal situations in
which net realisable value is likely to be less than cost; that is,
where there has been:
- an increase in costs or a fall in selling prices,
- physical deterioration of stock,
- obsolescence of products,
- a decision as part of a company's marketing strategy to
manufacture and sell products at a loss,
- errors in production or purchasing (note that this will cover mistakes resulting in excess stock or the purchasing of products which do not sell at all).
It concludes with: ‘furthermore, when stocks are held which are unlikely to be sold within the turnover period normal in that company (i.e. excess stocks), the impending delay in realisation increases the risk that the situations outlined in (a) to (c) above may occur before the stocks are sold and needs to be taken into account in assessing net realisable value'.
