Stock valuation and depeciation help needed please.

richard72

Hi, I am a sole trader selling goods online (toys/games/DVDs etc, I have a rough stock valuation that has been calculated in to my profits.

However having reviewed my stock today, I have found the realistic resale stock value to now be considerably lower than previously calculated (when i say considerably I mean astronomically).

One example is I have a few dozen different games for I purchased for an average of £5 per unit 3-4 years ago, at the time I was selling for aprox £8 - £20, so any stock left at the end of the year had a value of £5 to be added to profits (as this is the lower of either realistic resale value or purchase price).

Foolishly, I am quite stubborn and when I should have started to reduce prices as everyone else was selling there stock off I didn't hopping for an increase again (this never happened for most of them)
Yes, I already know what you going to say :-) but its done now and I have learned from my mistakes i.e. make what profit you can then get rid of it.

I know I should have depreciated it gradually each year, but i always considered it didn't really apply to me as I was still asking the same price, I now know different.
This has resulted in the realistic resale value (including postage) to be less than it would cost me to post with selling fees included. So the stock is just stagnant and there is no point in me selling it. (it has no value at all to me).

can I just write this stock of as worthless i.e. I have about 200uints with a purchase price of £5 (£1000) in my current stock valuation.
Would i get into trouble for doing this? As i should have decreased the value gradually?

Sorry for the long explanation, any advise would be greatly appreciated.

Just one other thing while I am waffling on, can/does/should I increase stock value sometimes? i.e. I purchase a toy for £10, resale value is £30, so I am doing good. The price next year falls to £8, after postage/fees the stock is only really worth £5, so I decrease my stock value accordingly, however being stubborn I hold on to the stock, 2 years later the toy is no longer in production and stocks sell out fast as its a popular toy, so I am now able to sell at substantial profits again. I original purchased for £10 per unit so obviously I shouldn't go higher than this, but should I increase it at all once I have depreciated it?

One example of this causing a problem would be.
I purchase no stock one year, and after postage/selling fees/office equipment and other general expenses I make 40k.
I have only sold 10k worth of stock (I have 100k in stock left-example), so my taxable profit is 30k, as I have already payed the tax on the stock. After revaluation some stock I wrote of or reduced by over 80% comes into play again, lets say by 10k (this is unexpected) So my stock value is still the same, so not deductible from my taxable profit.
Do i do this? and is the 40k still fully taxable?

Thanks in advance to anyone that can help, and sorry again if I went into to much detail, but i thought it was probably all relevant.

Richard.
P.S. i am not trying to cut my tax, just work out my books correctly, I wasn't sure if i have posted this in the correct forum or not.

chrismac1

The accounting policy on stock is to include at the lower of:

1. Cost
2. Net realiasble value. (NRV)

So in the example you quoted where you bought at £10, the NRV would be £5. You should keep on file some sort of evidence - such as recent sales made at the £5, evidence of how the market for these items has been moving - so that in the unlikely event you get a visit from HMRC and they challenge the stock value, you have something to support it.

richard72

Hi, thank you for your kind reply, I realise you meant your best but I have already mentioned I am aware of how to value stock, it just I have some unique circumstanses (well maybe no unique, but not neseserally the norm).

There are several other very important questions in there, please please read a little more carefully, but any furthar advise from anyone else would be greatly apreciated, it is getting quite urgent now as I am trying to fill in my 2010-1011 tax return.

1) Can/should I depreciate stock to £0 in one year from the full value, or can I get into trouble for not doing it gradually?

2)(Not mentioned but just thought of it) Can I keep writen of stock just incase I am able to sell it even for a pittance?

3)Can/should I increase stock value sometimes? Is this the norn? Or would it be seen as stock manupilation? It is not, I am just trying to accuratly get my stock value at the end of every tax year.

4)If 3 is an aplicable, I am guessing I would have to pay tax on those profits? As money which had been taxed and invested in stock has increased.
A very basic extreme example;- I have 200k of stock, I do no trade what so ever in the whole tax year, when I go to submit my tax return, I discover that my stock value has increased substantially, lets say 250k.
Am I taxable on 50k? As I wasnt sxpecting a tax bill as I have done no trade.

5) Another question I just thought of and is quite important.
Sale frequency, I buy 200 units for £10, sell for £25, am I am the cheapest.
After 3 years I have sold 100units, so make my money back have still have 200units to sell. Extreme example again but relevant, ;- i am still the cheapest, but have only sold 1 unit in the next 2 years. At that reate it will take me 200 years to sell it. How would i value the stock? Reducing it to £5 doesnt help (25% of the rrp) , no one wants it any more. Do I value it as to how many units I am likely to sell in the next 5/10/or 20 years?
I have had situations, where I can hardly give stock away, yet once every few months I might sell one of these out of date items for a good price, but I am never going to sell it all.
Ok, that was a long one, I hope someone can understand what I trying to get at.

6) Just thought of 1 more . How do I properly dispose of unsaleable stock, its good quailiy stuff but no one wants it, I got realy stressed the other day and just took about 1ks worth of stock to the tip, can i get into trouble for this also? Should I keep the stock so someone can view it? its just I have like 200units but I am only likely to ever sell a max of 50 (reducing the price of these items doesnt increase the sales hardly atall).

Am i maybe over thinking stock valuation? Should i just go ahead and do what I thinks beast?

Thank you richard.

agrinnall

These questions are too complex to get a reliable answer on a public forum, you should be asking your accountant. If you don't have one then I think you should get one now or potentially face serious financial issues in the future.

pjclar02

Hello there

In answer to your specific questions:

1 and 2) If your stock is obsolete, then you can write it down to £0 immediately if that is an appropriate valuation. You will not "get into trouble" although I would be asking why you continue to hold it if it is worthless - surely you would throw it away and make space for new stock? Ultimately, if you write the stock down to £0 and then sell it, all that will happen is that you will pay more tax on the profit when you do sell.

3) As you know, stock should be valued at the lower of cost and net realisable value. Therefore, I can see few instances where you would increase the value of your stock. The only way you would need to revalue your stock upwards, is if you have devalued the stock below cost, and subsequently realised that a certain game is coming back into fashion again and therefore you could revalue it back up to the higher realisable value (capped at cost)

4) Yes - if you increase the value of your stock by £50k you will pay tax on it. However, if you haven't been trading I don't see how your stock value would have increased - subject to the example in point 3) above.

5) You need to take a view. If in general no-one wants the games anymore I would write the value down to £0, and then on the odd occasion where you are able to sell one for £5 or £10 just accept that you will pay tax on the whole amount received.

6) I don't know the legal answer to that - I don't see any reason why you cannot take the unsaleable items to the tip. However, I have a client who designs, manufactures and sells computer games - and when a sequel is brought out the first game essentially becomes obsolete. They sell them off in bulk at less than cost - maybe £1.50 per unit to overseas distributors.

You possibly are over-thinking the stock valuation. Many of my clients pluck a figure out of the air for their closing stock valuation!! However, the more accurate you are with your valuation the better placed you will be in the event of an HMRC enquiry.

chrismac1

In practice this is a no-brainer. I say that as someone who has booked stock write downs of over £500k several times in my career. Not I hasten to add on stock that had grown obsolete on my watch, but on moving in to a new plant the sensible thing if you value your job is to go through the warehouse with a fine tooth comb and write down or write-off slow moving items gathering dust, spoiled jobs which lax supervisors have allowed to be booked into the store instead of sent for scrap, and so forth.

1. You right it down to net realisable value, if this is zero then so be it.
2. You scrap anything you can't sell and make way for stuff you can sell.
3. Anything you are keeping and not scrapping you record why you're doing that.
4. You make good records of the write-down. If I were doing your accountant and it were material I'd look to show it separately in the accounts as exceptional so that gross margin didn't look silly which just gets banks and HMRC taking an unwelcome interest in you. You don't really want to wash your dirty linen in front of the bank unless you have to, and you don't want a visit from HMRC seeking to discover why GM is down the pan.

richard72

Thanks for the advice guys, you both seem to know what you are talking about.

@pjclar02
""3) As you know, stock should be valued at the lower of cost and net realisable value. Therefore, I can see few instances where you would increase the value of your stock. The only way you would need to revalue your stock upwards, is if you have devalued the stock below cost, and subsequently realised that a certain game is coming back into fashion again and therefore you could revalue it back up to the higher realisable value (capped at cost)""

Yes your right I was referring to when I devalue to stock below cost, and thanks for the advice, i didn't want to depreciate something to low, then when they check my records, the selling price is higher than my purchase price when I have devalued it to less than 50% of purchase price.

"You possibly are over-thinking the stock valuation. Many of my clients pluck a figure out of the air for their closing stock valuation!! However, the more accurate you are with your valuation the better placed you will be in the event of an HMRC enquiry."

Again I think you right, I spoke to an accountant today and they basically said make it up, if I put 40k as stock but its worth 20k or 60k I should be fine as the stock holder is in the best position to value there stock and as long as its not to far out i.e as long a I dont value a small box of dvds a 5k I should be fine.

That being said I'm not going to make it up as I have a good idea of its real value.

So I have taken it all on board, and i am doing my stock valuation now :-).
Might take me 3 or 4 days but you never know I might find some good stuff in old tatty boxes i forgot about.

I hope someone else in a similar position to me finds this thread usefull as after lots of googling i couldn't find any threads with the info I needed.

Thanks again to you all and I am now confident i will get an accurate valuation.

Good luck in all your ventures.
Richard.