Inventory valuation: what it means for UAE businesses.

What inventory valuation means

Also called: Stock valuation, Closing stock.

Inventory valuation is how a business puts a figure on the goods it holds for sale, and on raw materials and work in progress, at the end of a period. That figure decides cost of sales, so it decides gross profit, and in the UAE it therefore decides part of Taxable Income.

Under IFRS for SMEs, and IAS 2 under full IFRS, stock is measured at the lower of cost and estimated selling price less the costs to complete and sell. Cost covers the purchase price, import duties, transport and handling, less trade discounts. Taxes the business can recover, such as input VAT, are left out. Items that are not interchangeable use their specific cost. Everything else uses first in first out (FIFO) or weighted average. Last in first out (LIFO) is not allowed.

Two UAE rules sit on top. The Tax Procedures Executive Regulation lists inventory records, with quantities and values at the end of each tax period and the records of stock counts, among the books a business must keep. And under the VAT law, goods still held when a business deregisters are a deemed supply unless an exception applies, so the stock records also drive a final VAT charge.

How it works

• Measure each line at the lower of cost and estimated selling price less costs to complete and sell, and write down damaged, slow moving or obsolete stock.
• Include purchase price, import duties, freight and handling in cost. Exclude recoverable input VAT, storage after purchase, selling costs and abnormal waste.
• Use FIFO or weighted average consistently for stock of a similar nature and use. LIFO is not permitted.
• Count stock at the tax period end and keep the count sheets: the Tax Procedures Executive Regulation requires inventory records and stock count records.
• Closing stock reduces cost of sales, so an overstatement raises Taxable Income and an understatement lowers it until the next period corrects it.

Worked example

A Deira electronics trader buys 100 units at AED 400 and later 100 units at AED 460, all before VAT. It sells 150 units in the period. The table compares the two permitted cost formulas.

Total purchases (200 units)	AED 86,000
FIFO cost of sales (100 x 400 + 50 x 460)	AED 63,000
FIFO closing stock (50 x 460)	AED 23,000
Weighted average cost of sales (150 x 430)	AED 64,500
Weighted average closing stock (50 x 430)	AED 21,500

The choice of formula moves AED 1,500 between cost of sales and closing stock, so pick one, apply it every period and disclose it.

Common mistakes

• Adding recoverable input VAT to the cost of stock, which overstates closing stock and profit.
• Rolling forward the system quantity with no physical count at the year end, leaving no stock count record for the Federal Tax Authority.
• Carrying obsolete or damaged stock at cost instead of writing it down to what it can be sold for.

The law

• Cabinet Decision No. 74 of 2023, Executive Regulation of the Tax Procedures Law, Article 2, Clause 1 (inventory records and stock counts)
• Federal Decree-Law No. 8 of 2017 on Value Added Tax, as amended, Article 11, Clause 4 (goods owned at deregistration are a deemed supply)
• Federal Decree-Law No. 47 of 2022, as amended, Article 20, Clause 1 (Taxable Income based on financial statements)

Frequently asked questions

Can we switch from weighted average to FIFO?

Yes, but it is a change in accounting policy, justified only if it gives more relevant information, and it must be explained in the accounts. It will also change the Accounting Income on which Corporate Tax is based.

Is a stock write-down deductible for Corporate Tax?

Taxable Income starts from the accounting profit, so a write-down recognised under IFRS or IFRS for SMEs normally reduces it. A human should check any large or unusual write-down against the general deduction rules.

Related terms

Deemed supply · Taxable income · Year-end close · IFRS for SMEs · Input tax. See every term in the UAE tax glossary.

For the full picture, read our guide: Bookkeeping for restaurants and cafés in Dubai: what to track every month.

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