Often, this column is guided by the questions business owners ask me. Today, I want to discuss stock – by that I mean inventory rather than shares.
The UAE is noted for its wholesale and retail sectors, so a great many businesses should be addressing the question about what their stock in hand is worth in their annual accounts.
Any amendment to the purchase value of a sold good has an impact on net profits, thus affecting that business's corporate tax position.
Let’s start by confirming that there is a broad spectrum of stock types. Here, I’m going to look at perishable versus non-perishable, and slow-moving versus fast-moving consumer goods.
Perishable shelf life varies widely, from a same-day pastry, five-day dairy to multiple-year fizzy drinks. Each will carry its expiry date.
Typically, at the end of a fiscal year, a stocktake is conducted to ascertain what inventories are held. The accounting value of these will be the landed purchase cost. This is what you paid the supplier plus shipping, excise duties where applicable, and any other incidental costs. Across multiple items, the latter would be divided on a proportional basis.
UAE corporate tax dictates that the rules of International Financial Reporting Standards must be applied when calculating values. These apply unless there is a specific provision that mandates a different treatment.
The good news is that inventory is measured at the lower end of its cost and its net realisable value. The difference between these two is called an impairment calculation, the positive or negative position being a profit and loss event. This means it impacts corporate tax.
As these represent unsold stocks, what happens when they are sold? The sale price is what a customer paid. The cost of goods sold against that sale is the current purchase value in the business’s accounts, allowing for any impairment. The difference is your profit and that is taxable.
So far we’ve just been examining the process from a high level. Let’s dig a bit deeper.
The truth is that the volumes of stock are likely to be high. In some cases, it could be thousands. As some items are perishable, it’s important that older items are sold first.
Take food and beverages outlets. The newest items are typically stocked at the farthest locations. This is because they may take a few days to clear, if indeed they do. If not, in their last day or two of saleability, they are moved to the busiest outlet where they are likely to be sold on the same day.
It does not make the customer experience any less enjoyable, but it ensures a minimum of waste – something to be welcomed from an environmental perspective.
With short-term perishable goods, it makes the choice of measurement an easy one, as there are two approaches: weighted average cost in this case. This looks at the value of all items in an inventory, determining the cost of goods sold and remaining items to be sold.
What about non-perishable goods, such as sports equipment or clothing? As these are normally seasonal and may have a time-sensitive fashion component, they are measured in numbers held within categories called skews.
The best tax treatment here is that the goods purchased first are considered to be the first sold.
The catch is proving that your stocktake, done at the end of trading on the last day of your fiscal year, can be reasonably validated months or even years after the event by a government regulatory body audit.
This is why a business’s auditors are normally present to sample test the work being conducted. Since all businesses do not require an external audit and might choose not to conduct one, where do they stand?
In the same place. The regulatory authorities need to be convinced that the values assigned, which feed into your tax return, are correct. Your documented methodology and record keeping need to be sufficient to achieve this. The onus is always on the business reporting its numbers.
With one year of corporate tax reporting almost complete for all businesses, ask yourself, how did you do? You could always ask the second set of eyes, which should have been there at the stocktake, for their opinion.
