Short-dated and expiring stock

How does IAS 2 apply to expiring stock?

IAS 2 requires inventory to be carried at the lower of cost and net realisable value, so stock is written down when it is damaged, has become obsolete or can only be sold at a lower price. Net realisable value is estimated from the most reliable evidence available when the estimate is made, and events after the period end are taken into account where they confirm conditions that existed at the period end, such as the prices achieved for clearance stock in the following weeks. Write-downs are usually made item by item, or for groups of similar items in the same product line; writing down a whole category such as finished goods with a single percentage is not appropriate. See net realisable value.

Why does remaining shelf life matter so much?

Large retailers commonly require a minimum remaining life when goods are delivered to them, often expressed as a fraction of the total shelf life, so that they have time to sell the goods. Stock that falls below that threshold cannot go to the main customers at the normal price, even though it is still in date. It has to go to discount stores, wholesalers, staff shops, export markets with different requirements or food banks, usually at much lower prices or for nothing. So the remaining shelf life of each batch, not just its total quantity, drives its net realisable value.

Expiring stock: write-downs by remaining shelf life

At the year end, a food manufacturer holds finished goods costing US$ 1,200 thousand. It groups them by remaining shelf life and estimates net realisable value for each band from the prices it actually achieved for similar stock over the past year, less selling costs.

The manufacturer writes the stock down by 116 thousand to 1,084 thousand, recognised in cost of sales. The fresh stock is not written up to its higher selling price, because inventory is never carried above cost, and its value cannot be used to offset the losses on older stock. The expired stock is written down to nil because it will be destroyed; the cost of destroying it is recognised when it is incurred, unless the company already has an obligation to pay it.

Can a company use a policy based on age?

Yes, provided the policy produces a reasonable estimate of net realisable value. A policy that writes down stock by bands of remaining shelf life is practical for companies with thousands of products and batches, but the percentages need to be based on what the company actually recovers for each band and reviewed regularly against outcomes. A general provision that is not linked to evidence about specific stock is not allowed, and an excessive write-down that is released in a later year would distort profits in both years. Slow-moving stock that is not near its date, such as a discontinued flavour, is assessed in the same way, based on its expected selling price.

What about ingredients and packaging?

Ingredients and packaging held for production are not written down below cost if the finished products they will be used in are expected to sell at or above cost. They are written down when they cannot be used before they expire, or when they become obsolete, for example printed packaging made unusable by a new design, a recipe change or new labelling rules. Where materials are written down, their replacement cost may be the best measure of net realisable value. See obsolete inventory in manufacturing.

Can a write-down be reversed?

Under IAS 2, yes. If the circumstances that caused the write-down no longer exist, or there is clear evidence of a higher net realisable value, such as a discount chain agreeing to buy short-dated stock at a better price, the write-down is reversed, but only up to the original cost. The reversal reduces cost of sales in the period it occurs, and IAS 2 requires disclosure of the amounts written down and reversed, and the circumstances that led to any reversal.

What about stock that is donated or destroyed?

Stock that will be donated to food banks or charities will not be sold, so its net realisable value is nil and it is written down when the company decides to donate it or when it reaches the condition in which it can only be donated. The cost is an expense, usually in cost of sales. Tax rules for donated and destroyed stock differ between countries, and some allow extra relief for food donations, so the tax treatment needs checking separately from the accounting.

How do returns of expired goods from retailers affect this?

If retailers can send back goods that pass their date, the supplier expects some stock to come back with little or no value. Under IFRS 15, it recognises revenue only for the goods it expects to keep sold, and its asset for goods expected back is measured at their former cost less the expected fall in their value, which may be nil for goods that will be destroyed. See returns and markdown allowances.

How does US GAAP differ?

Under ASC 330, inventory measured using FIFO or average cost is carried at the lower of cost and net realisable value, defined in the same way as IAS 2, while inventory measured using LIFO or the retail inventory method uses the lower of cost or market. The main difference is that a write-down creates a new cost basis that is not reversed if the value recovers. See ASC 330 lower of cost and net realisable value and FMCG accounting.

This guide is general information. It is not tax or legal advice for your situation.