Inventory valuation and obsolete stock in a seasonal business
Bloemen Import bv imports cut flowers and plants. At 31 December 2024 inventory at cost is €380,000. Of this, €120,000 relates to a Christmas line that was not sold by year-end; the company expects to sell it in January 2025 at a reduced price. The estimated selling price is €70,000, and selling costs are €8,000. Another €40,000 relates to a summer line that is now out of season; it can be sold in June 2025 for €30,000 with selling costs of €4,000. The remaining €220,000 is fresh stock expected to sell at cost plus a normal margin. The company's gross margin is 35%. The accountant has not written down any inventory and argues that flowers are perishable but the company has always sold at a discount without a write-down.
1. Calculate the net realisable value of each inventory category and determine the required write-down at 31 December 2024.
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IAS 2 requires inventory to be measured at the lower of cost and net realisable value (NRV). NRV is estimated selling price less costs to complete and sell.
Christmas line: cost €120,000; NRV = €70,000 − €8,000 = €62,000; write-down = €58,000.
Summer line: cost €40,000; NRV = €30,000 − €4,000 = €26,000; write-down = €14,000.
Fresh stock: cost €220,000; expected to sell at cost plus normal margin, so NRV exceeds cost; no write-down.
Total write-down = €58,000 + €14,000 = €72,000. Inventory at 31 December 2024 = €380,000 − €72,000 = €308,000. The write-down is an expense in 2024.
The accountant's argument that the company has always sold at a discount is not a reason to skip the write-down; the question is whether the expected selling price is below cost at the reporting date. The Christmas line clearly is. The summer line is also below cost. Document the estimates and the basis for the selling prices.
2. The client says the Christmas line will be sold in January at full price to a new customer who has not yet confirmed. How does that affect your conclusion, and what evidence would you require?
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A verbal expectation of a full-price sale is not sufficient evidence to ignore the NRV test. The reporting-date NRV should be based on the most reliable evidence available at the time the financial statements are authorised. If a firm purchase order from the new customer exists before the year-end or before the accounts are finalised, it may support a higher NRV, but the order must be binding and the price must be achievable.
Evidence to require: a signed purchase order or contract, the customer's creditworthiness, the delivery date, and the price. If the order is conditional or the customer is new and unverified, treat it with caution. Also consider the risk that the flowers deteriorate before delivery.
If the order is genuine and supports a selling price above cost, no write-down is needed for that line. If it supports a price below cost, write down to the NRV based on the order. If there is no reliable evidence, keep the €58,000 write-down. Document the judgement and disclose the inventory write-down in the notes.