Stock Valuation

JodieR · April 2009

My client has been running a bridal shop for about 4 years now and spotted an article in a bridal magazine saying that in the trade stock which is over a year old can be writted down by 50%, over 2 years by 80% and over 3 years by 90%. Now I've read up about the use of formulae to value stock and HMRC seem to take the view that so long as the formulae reflect a fair view of what actually happens then they're acceptable, but is it just me or do these percentages seem a little extreme? I asked the client whether the items on average were on sale for those amounts (say for example a bridesmaid's dress, bought for £40, originally retailed for £80 3 years ago, is it really going to only be on sale for just £4 now?) and he said that a lot of the items are priced higher than 10% of the cost price, but they don't expect that all will sell at those amounts. And he did give examples of £1000 dresses selling on ebay for £50.
I've not got many clients who hold a great deal of stock so I'm not sure what to do here - is it common practise to use formulae to value stock, or do I need to be a bit more cautious and get details of how much the items are on the shelves for?
Thanks
Jodie

deanshepherd · April 2009

How accurate you need to be depends on how material the stock figure is to the accounts.

For a single bridal shop I suspect it is not a huge issue.

The example you give of a £40 dress is probably not what the article was thinking of. A £5,000 designer dress that has been hanging in the shop window for 3 years may indeed only fetch £500.

The shop owner will have a better idea than anyone of how much she is likely to realise from the sale of her stock. Better to have a chat with her and then use a formula based on that conversation.

Hasan.Ahmet · April 2009

Stock

In simple technical terms stock is valued at lower of cost or net realisable value. What is net realisable value becomes the question need answering.

JodieR · April 2009

Thanks, I know I'm probably thinking about this too much, but they do hold a lot of very old stock and it is a material figure in the accounts so I really do want to try to get it as accurate as possible.
Say, for example, they've got 5 of a certain summer dress in stock which were purchased at £100 each 3 years ago, and at the year end were on sale at £40 each. However they only expect to sell maybe 2 of these dresses in the next few months and then plan to reduce the remaining stock to £5 each to clear them. Should they then be valued at £200 (5 x £40), or £95 (2 x £40 plus 3 x £5)? I think that's what I need to get to the bottom of here!

Monsoon · April 2009

I have a dress shop on my books and they do indeed write down the stock at an alarming percentage. When I queried it, the lady said that it was indeed the lower of cost and net resaleable value, and that the resaleable value was indeed very low for past-season stock.

Monsoon · April 2009

JodieR wrote: »

Thanks, I know I'm probably thinking about this too much, but they do hold a lot of very old stock and it is a material figure in the accounts so I really do want to try to get it as accurate as possible.
Say, for example, they've got 5 of a certain summer dress in stock which were purchased at £100 each 3 years ago, and at the year end were on sale at £40 each. However they only expect to sell maybe 2 of these dresses in the next few months and then plan to reduce the remaining stock to £5 each to clear them. Should they then be valued at £200 (5 x £40), or £95 (2 x £40 plus 3 x £5)? I think that's what I need to get to the bottom of here!

If it's a pretty accurate assessment, backed up by historical sales, I'd go for the £95. You want the best deal for your client, and as long as you can justify it (which it sounds like she can) then go for it.

JodieR · April 2009

Thanks very much - I feel better about the situation now!

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