Walk into the warehouse of any company, establishment or co-operative society and you will find goods stacked high, with a carrying amount of KD 2 million or more. On the balance sheet it reads: “Current assets – Inventories”. The figure is correct on the books, but it does not tell the whole truth.
In reality, you may find that a large proportion of this inventory is expired, slow-moving or damaged. The balance sheet does not lie, but it does not reveal the hidden risks. Inventory in this condition is not a healthy asset; rather, it can turn into a source of losses and undisclosed financing.
1. The Old Trick: Cost Will Get You Off the Hook
The core standard, IAS 2, is clear: inventories are measured at the lower of cost and net realisable value (NRV). But what actually happens in practice in many companies, establishments and societies?
- The accountant records at full cost, with no periodic review.
- Expiry dates are not checked systematically.
- The rate of movement of slow-moving items is not reviewed.
The result: a fictitious profit, because the loss was not recognised at the right time. The loss does not occur on the day the goods spoil; it begins on the day of purchase, or with poor storage, or with weak planning.
An illustrative example: you bought a quantity of milk at a cost of KD 10,000. It expired and its real value became zero, yet it is still carried on the balance sheet at the same amount. The book figure is correct in form, but it conceals a real loss.
2. Presenting the Losses in the Financial Statements
The core standard for writing down inventories is IAS 2. IFRS 18 (which deals with presentation and disclosure in financial statements), for its part, makes the way these losses are presented clearer, so that they appear within operating items rather than hidden in general and administrative expenses.
The practical upshot:
- Any impairment loss on inventories is presented within operating results.
- The inventory costing method (FIFO or weighted average) must be disclosed.
- The amount of the write-down charged to the period must be disclosed.
In other words: it is no longer easy to flatter gross profit by hiding inventory losses.
3. Three Signs That Your Inventory Is a Bomb
In your company, establishment or society, put these three questions to the accountant:
A – How many days do the goods stay in stock (Stock Days)? The normal level here generally ranges between 25 and 35 days, depending on the nature of the items. If the figure reaches 60 days or more, you are financing slow-moving goods out of the shareholders’ money.
B – What is the monthly rate of damaged and expired goods? If the rate exceeds 1.5% of purchases on a continuing basis, the problem lies either in the purchasing policy, or in storage conditions, or in weak sales forecasting.
C – Is there an inventory ageing report? Like the receivables ageing report. Any item that has not moved within 90 days is a potential loss in the making and must be reviewed immediately.
4. The Root Causes (Not Merely Accounting Ones)
The problem usually runs deeper than the accounting entries. Among the most prominent causes:
- Buying large quantities because of suppliers’ offers or “fear of running short”.
- The absence of an automated alert system for expiry dates.
- A weak link between purchases and actual sales (poor forecasting).
- The absence of a written and approved policy for writing down inventories and reviewing it periodically.
5. The Practical Solution for the Board of Directors
Do not settle for a conventional inventory report. Ask for the following reports on a regular basis:
- A monthly NRV report: a list of any item whose cost is higher than its current selling price less expected selling expenses.
- A slow-moving stock report: every item that has not been sold within 90 days.
- An inventory turnover report by category: because some categories (foodstuffs, cleaning materials, etc.) are by nature slower than others, the comparison must be made within each category.
And the decision required:
- Immediate write-down and sale of slow-moving or near-expiry goods.
- Charging the loss to the same period in which it was discovered.
- Holding the purchasing officer to account alongside the storekeeper.
- Adopting a written policy for writing down inventories and reviewing it at least quarterly.
Conclusion
Many of the companies, establishments or societies that went bankrupt in Kuwait did not go bankrupt for want of sales; they went bankrupt because of inventory that was carried at millions on paper, while its real value was far lower. The difference was being financed by suppliers and creditors… until the bomb went off.
A strong balance sheet is not one that holds a large inventory. A strong balance sheet is one whose inventory is fast-moving and clean.