Slow-Moving Stock: How to Find It and Value It Properly

Most SME balance sheets carry some stock that is worth less than the number next to it. Lines that have not moved for a year, damaged goods and items you now sell below cost all inflate profit until someone deals with them. With December year ends close, now is the time to find that stock and value it properly.

The rule: lower of cost and net realisable value

Under IFRS, inventories are measured at the lower of cost and net realisable value. Net realisable value, or NRV, is the estimated selling price in the ordinary course of business, less the estimated costs to complete the item and the costs needed to make the sale. In plain terms: what you will actually get for it, after the cost of getting it sold.

India's AS 2 sets the same rule. An ICAI refresher session on AS 2 calls it "the single most important rule in AS 2". Under IFRS, any write-down is recognised as an expense in the period it occurs, not carried forward quietly.

Two points catch people out. First, stock is usually written down item by item, unless it is more appropriate to group similar or related items. A healthy margin on your best sellers does not cover losses on dead lines. Second, if NRV later recovers, the write-down is reversed and recognised as a reduction in the inventory expense in the period the reversal happens.

A five-step method to find and value slow-moving stock

Step 1: Run a stock ageing report. Group every item by the date it last moved: 0–90 days, 91–180 days, 181–365 days and over a year. If your system cannot show last movement, use the last sale date.

Step 2: Walk the floor with the people who sell it. Sales and warehouse staff know which lines are dead, damaged or replaced by newer models. A short walk-through often finds more than the report does.

Step 3: Estimate what each item will really fetch. Use recent selling prices, current price lists or quotes from clearance buyers. Then deduct the costs still to come, such as repacking, transport, commission and discounts.

Step 4: Compare with cost and write down the difference. Where NRV is below cost, the gap is your write-down. For stock with no sales at all and no buyer in sight, NRV may be close to scrap value.

Step 5: Write down your reasoning. Auditors will want to see how you got from the ageing report to the final number. A one-page note per stock category, with your assumptions and evidence, saves hours during fieldwork.

For example, a Doha building materials trader holds 2,000 boxes of a discontinued tile range bought at QAR 40 each, a cost of QAR 80,000. Nothing has sold in ten months. A clearance buyer offers QAR 30 a box, and transport and handling will cost QAR 4 a box. NRV is QAR 26 a box, or QAR 52,000, so the write-down is QAR 28,000.

A word on flat percentage provisions

Many SMEs use a simple rule, such as providing 50% against anything over a year old. It is quick and easy to apply consistently, and it can be a sensible starting point.

The risk is that it does not match reality. Some old stock still sells at full price, while some newer stock is already worthless. Test your rule against actual sales and clearance prices each year, and be ready to show your auditor why it gives a fair answer.

What this means for your business

For GCC trading companies, stock is often one of the largest items on the balance sheet. Long shipping times, currency moves and changing customer tastes mean the landed cost of goods can drift away from what they now sell for. Stock valuation is a key area for auditors, so a clean ageing report and a clear method will speed up your audit.

For Indian businesses, note that the ICAI material states that LIFO is not permitted under AS 2, and that only FIFO, weighted average or specific identification may be used. Indian groups with GCC subsidiaries should use the same cost formula and ageing buckets across the group, so the consolidated numbers line up.

Tax treatment of stock write-downs and provisions differs between countries and depends on the details, so check with your adviser before you assume a deduction.

There is also a cash point. Stock that does not sell ties up money and warehouse space. Finding it is the first step to clearing it, and to stopping the reorders that created it.

Your year-end stock checklist

• Run a stock ageing report by last movement date
• Walk the warehouse with sales and stores staff and tag damaged or obsolete items
• Get current selling prices or clearance quotes for anything older than 180 days
• Deduct the remaining costs to sell before comparing with cost
• Test any flat percentage provision against actual sales data
• Write a short note on your method and evidence for the auditors
• Agree a clearance plan for dead lines and stop reordering them
• Check the tax treatment of any write-down with your adviser

If you use NexCFO, adding stock ageing to your monthly MIS report keeps slow-moving lines on the agenda all year, not just in December.

Stock that does not sell is not an asset at full value. It is a decision waiting to be made.