Inventory is where trading businesses most often fail an audit — not because the stock is wrong, but because the count was badly timed or the valuation cannot be explained. Under IFRS, inventory is carried at the lower of cost and net realisable value, and the count has to happen at or near the year-end date. Neither can be fixed afterwards.
What cost includes
Cost is not just the supplier invoice. It includes everything incurred bringing the inventory to its present location and condition:
- Purchase price, less trade discounts and rebates
- Import duty — a real, non-recoverable cost that belongs in inventory (see customs duty and import VAT)
- Freight, insurance and handling to bring the goods in
- For manufacturers, direct labour and a systematic allocation of production overheads
Excluded: recoverable VAT, storage after the goods are ready for sale, selling costs, and abnormal waste. A trading business that values stock at supplier invoice alone is understating inventory and overstating cost of sales — which flatters nothing and distorts both years.
Import duty is the line most often missed. It is 5% of CIF, it is not recoverable, and it is part of the cost of getting the goods here. Leaving it out is a systematic understatement that compounds every year you hold stock.
Net realisable value
NRV is the estimated selling price in the ordinary course of business, less the costs to complete and to sell. Where NRV is below cost, inventory is written down and the loss goes to profit immediately.
This is a judgement your auditor will test. Slow-moving stock carried at full cost is one of the most common audit adjustments in the UAE, and the usual cause is that nobody looked. An ageing analysis — how long each line has been held, and how much sold in the last twelve months — is the evidence that supports the position either way.
Costing methods
| Method | Permitted under IFRS? | Best for |
|---|---|---|
| FIFO | Yes | Most trading businesses; matches physical flow |
| Weighted average | Yes | Homogeneous or bulk goods |
| Specific identification | Yes, and required for non-interchangeable items | High value, serialised goods — vehicles, jewellery, machinery |
| LIFO | No — prohibited | — |
Pick one, apply it consistently to inventories of similar nature, and do not switch without a genuine reason and disclosure. Switching method to improve a result is a change your auditor will challenge.
The stock count
The count is the evidence that the quantity exists. Timing is not negotiable: it must be at or very close to the year-end date, and your auditor will normally want to attend. A count done in February with no reconciliation back to December is not evidence of December’s balance.
Running it properly
- Tell the auditor the date well in advance so they can attend.
- Freeze movements during the count, or record them meticulously if you cannot stop.
- Count in pairs, with someone independent of the warehouse involved.
- Use pre-numbered sheets and account for every one, including spoiled ones.
- Record the last documents — final goods received note and final delivery note numbers — because that is how cut-off is proved.
- Identify damaged and obsolete items as you count, not later.
- Investigate variances before adjusting. A large unexplained difference is a control finding, not a posting.
That fifth step is what makes cut-off provable, and cut-off is where the errors are — goods received before year end but invoiced after, or shipped after but invoiced before. Our year-end checklist covers the wider close.
Why this matters beyond the audit
Inventory is usually the largest number a trading business gets wrong, and it flows straight through to corporate tax — overstated closing stock means understated cost of sales, overstated profit, and tax paid on profit you did not make. Understated stock does the reverse and creates an exposure.
It also affects free zone businesses claiming QFZP status, where audited accounts are a condition, and warehouse operations in particular tend to have strong substance but weak inventory discipline. Our audit team attends counts for clients across the UAE.
Frequently asked questions
How is inventory valued under IFRS?
At the lower of cost and net realisable value. Cost includes purchase price, import duty, freight and handling; NRV is expected selling price less costs to complete and sell.
Does import duty go into inventory cost?
Yes. Non-recoverable duty is part of bringing the goods to their present location and condition. Recoverable VAT is not.
Is LIFO allowed in the UAE?
No. IFRS prohibits LIFO. FIFO, weighted average and specific identification are permitted.
When must the stock count happen?
At or very near the year-end date. A count taken well after year end with no reconciliation back does not support the balance.
Does the auditor have to attend the count?
Where inventory is material, normally yes. Give them the date in advance, because attendance cannot be arranged retrospectively.
What if we find a large variance?
Investigate before adjusting. A significant unexplained difference is a control weakness the auditor will report, and simply posting it makes that worse.
How do I evidence obsolete stock?
An ageing analysis showing holding period and recent sales volume, with a documented write-down policy applied consistently.