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HMRC internal manual

Business Income Manual

Stock: valuation: lower of cost and net realisable value: net realisable value

One of the acceptable bases of stock valuation is the lower of cost and net realisable value (section 13 of FRS102 refers to net realisable value as ‘estimated selling price less costs to complete and sell’). The meaning of cost is discussed at BIM33135 and net realisable value is discussed below.

The realisable value is the expected sale price of the relevant stock in the condition in which it is expected to be sold in the trader’s normal selling market. From that value are deducted the estimated further costs which will have to be incurred to get the stock into its normal sale condition to arrive at the net realisable value.

Net realisable value may be less than cost because of deterioration, obsolescence, or changes in demand. At the reporting date, however, there may be a reasonable expectation that the proceeds of sale of some stock in future reporting periods will not produce enough income to cover its cost. If so, a loss on such stock should be recognised in the reporting period under review by writing off the irrecoverable costs incurred.

If there is no reasonable expectation of sufficient future revenue to cover costs incurred then the stock should be stated at net realisable value. It is important to note that the valuation should be made on a normal commercial basis, for instance, it is not acceptable to value stock on the basis that it would have been sold in a forced sale on the reporting date in its then, possibly incomplete, state.

See BSC Footwear Ltd v Ridgway [1971] 47TC495 concerning the further costs that may be deducted in arriving at net realisable value. Generally the further costs need to be directly related to the specific disposal of the goods in question (for example salesmen’s commission, special promotional expenses etc) but precisely what costs can be directly related will depend on the particular facts.


Section 32 of FRS102 provides that events occurring between the end of the reporting period and the date when the financial statements are authorised for issue need to be considered in arriving at the net realisable value and gives a subsequent reduction in selling prices as an example of an adjusting event. Section 32 of FRS102 is considered further at BIM31040.