Inventory Valuation Methods, and Which to Use

There are two permitted methods and one rule that overrides both.

Why it matters more now

Your closing stock figure moves your profit directly. Higher closing stock, higher profit.

Since June 2023 that profit feeds your Corporate Tax computation. An inventory policy is now a tax position, and it needs to be consistent and documented.

FIFO, first in first out

You assume the oldest stock sells first.

Buy 100 units at AED 10, then 100 at AED 12. Sell 120.

Cost of sales is 100 at AED 10 plus 20 at AED 12, which is AED 1,240. Closing stock is 80 units at AED 12, which is AED 960.

FIFO leaves the most recent costs on the balance sheet, so your stock figure stays close to what it would cost to replace.

Weighted average

You average the cost of everything you hold.

Same numbers. Total cost AED 2,200 for 200 units, so AED 11 each.

Cost of sales is 120 at AED 11, which is AED 1,320. Closing stock is 80 at AED 11, which is AED 880.

Note the difference. Same purchases, same sales, and profit differs by AED 80 on this tiny example. Scale that up.

LIFO is not permitted

Last in first out is not allowed under IFRS.

If someone suggests it, they are working from a different framework. It does not apply to UAE financial statements prepared under IFRS.

The rule that overrides both

Stock is carried at the lower of cost and net realisable value.

Whichever method you use to arrive at cost, if you cannot sell the item for more than that, you write it down.

This is where most inventory errors sit. Not in the choice of method, but in carrying obsolete stock at full cost because nobody reviewed it.

Damaged goods, superseded models, and slow-moving lines that have not turned in two years are all candidates.

Choosing between the two

FIFO suits perishable or dated stock, where the physical flow matches the assumption, and where you want a current-value balance sheet.

Weighted average suits high volume interchangeable items where tracking individual batches is impractical.

Both are acceptable. What is not acceptable is switching between them to manage a result. Choose one, document why, and apply it consistently.

What your auditor will test

That you counted. A physical count at or near the year end, with the count sheets retained.

That the method is applied consistently to the prior year.

That the net realisable value review actually happened, and is not just an assertion.

Cut-off. Goods received before the year end and invoiced after, or shipped before and invoiced after. This is where stock and payables go wrong together.

The practical minimum

Count your stock at year end. Write down what cannot be sold at cost. Use one method and record which. Keep the count sheets.

Most inventory problems we see are the absence of these four, not a sophisticated valuation error.

Where we fit

We attend inventory counts as part of audit work. If you have never had one attended, that is worth arranging before your next year end rather than after.