Two traders can sell exactly the same goods at exactly the same prices and report different profit, simply because they value stock differently. That is legitimate, but it must be a deliberate choice, applied consistently, and set up properly in the ERP. This guide explains the two methods used by most UAE companies, how to treat imported costs, and what to check before your auditor does. It is general information; your accounting standards and auditor decide the final treatment.
Which methods are allowed
Companies reporting under IFRS, which is the common framework in the UAE, may value inventory using FIFO (first in, first out) or weighted average cost. The last-in-first-out method (LIFO) is not permitted under IFRS. Inventory is carried at the lower of cost and net realisable value, which is the expected selling price less costs to sell. Your auditor can confirm what applies to your company.
A worked example
Suppose a company buys the same item three times and sells 150 units in the month.
| Purchase | Units | Unit cost (AED) | Total (AED) |
|---|---|---|---|
| Opening stock | 100 | 10.00 | 1,000 |
| Purchase on the 10th | 100 | 12.00 | 1,200 |
| Purchase on the 20th | 100 | 14.00 | 1,400 |
| Total available | 300 | 3,600 |
FIFO: the 150 units sold are costed from the oldest layers: 100 at 10.00 and 50 at 12.00, which is 1,600. The remaining 150 units are valued at 2,000 (50 at 12.00 and 100 at 14.00).
Weighted average: the average cost is 3,600 divided by 300, which is 12.00. Cost of sales is 150 times 12.00, which is 1,800, and closing stock is 1,800.
When prices are rising, FIFO shows a lower cost of sales and higher profit; when prices are falling, the reverse. Over the life of the stock the total is the same; the timing differs.
Which method suits which business
- FIFO: goods with expiry dates, food and pharmacy, fashion, and items where the oldest should physically leave first.
- Weighted average: bulk or interchangeable goods such as building materials, chemicals and fasteners, and businesses with high transaction volume.
- Specific identification: unique high-value items such as vehicles, jewellery and machinery, where each unit carries its own cost.
Pick one method per item category, document it and do not change it without a reason and your auditor's agreement.
What goes into the cost: landed cost
Cost includes the purchase price plus costs of bringing the goods to their present location and condition: freight, insurance, import duty that is not recoverable, clearing and handling, and inland transport to your warehouse. It excludes recoverable VAT, storage costs after receipt and selling costs. For imports, record these charges against the shipment and allocate them across items by value, weight or quantity. See ERP for trading companies. Without landed cost, your margin looks better than it is, and your price list will be too low.
Foreign-currency purchases
Record the item cost in dirhams at the exchange rate on the date of the transaction. Exchange differences on settling the supplier belong in the profit and loss account, not in the item cost afterwards. Make sure the ERP applies the rate on the receipt date and does not revalue the stock later.
Write-downs: net realisable value
- Run a monthly report of items with no sales for 6 and 12 months, and items past expiry.
- Compare cost with the price you could realistically get now, less selling costs.
- Where cost is higher, write the item down by journal, with a reason and an approval.
- Keep a provision list your auditor can follow.
Count, adjust, repeat
Valuation is only as good as the quantities. Count regularly, post differences with reasons, and investigate repeat losses by location or person. Barcode scanning makes this faster. See barcode scanning setup and the inventory and warehouse management guide.
ERP settings to check
- The costing method on each item or category.
- That receipts post at landed cost, with a place for extra charges after the fact.
- That negative stock is blocked or reviewed, because it corrupts averages.
- That the stock subledger agrees to the stock account in the ledger at every month-end. See the month-end close checklist.
- That your multi-branch setup values each warehouse consistently.