Inventory at the year-end close – how is it counted and valued?
The general rule is a count at the end of the financial year – 31 December for calendar-year entities. The documentation has to show the type of goods, the quantity, the unit of measure, the value, the totals and the method of calculation, dated and showing who counted. For accounting, inventory is measured at the lower of cost and fair value – for tax the write-down rules are stricter.
Inventory drives the result
Where the business has booked too low a stock value at the year end, the cost of goods is too high and the result too low. Where the stock value is too high, the opposite happens. The relationship is: opening inventory + purchases − closing inventory = cost of goods An error in the stock is therefore always an error in the result – and so in the tax.
Counting at the year end
The general rule is a count at the end of the financial year – the stock at 31 December for calendar-year businesses. Businesses with an adequate stock accounting system can count earlier in the year, but all movements up to the year end then have to be documented satisfactorily. That is a higher documentation threshold, not a shortcut.
What the documentation has to contain
The stock count documentation has to show the type of goods, the quantity, the unit of measure, the value, the totals and the method of calculation. Both the accounting and the tax value have to appear. The documentation has to be dated and show who carried out the count. There is, however, no general requirement for a physical signature, or for two people always to count together. Many believe that is required; it is good internal control, but not a rule.
Which goods are included?
The starting point is which goods the business owns at the year end, regardless of where they physically are. That can be goods on its own premises, goods in external storage, goods held by a partner, goods in transit, raw materials, work in progress and finished goods. Goods belonging to others, such as consignment stock, must not be included – even where they sit on the business's premises.
Goods in transit
Goods in transit have to be assessed on the agreement, the delivery terms and when the goods are actually treated as transferred. The invoice date or the payment date is not decisive on its own. Goods invoiced in December and paid for in December can still belong to the seller at the year end, depending on the delivery terms.
Cost
For purchased goods the cost can include the purchase price, customs duty, non-deductible charges, commissions, freight, forwarding and transport. Discounts and rebates reduce the cost. That is the same logic as on import, where the VAT basis is built from more than the invoice amount – see VAT on imported goods
FIFO, average or specific cost
Where the goods can be identified individually, specific cost is normally used. For identical goods, FIFO or average cost can be used for accounting where specific allocation is not practical. For tax, FIFO applies to goods that cannot be individually identified. LIFO is not permitted.
Accounting valuation and obsolescence
Inventory is a current asset and is measured for accounting at the lower of cost and fair value. Stock that has gone out of fashion or fallen in value may therefore have to be written down in the accounts. Example: cost NOK 200,000, expected net realisable value NOK 80,000. Accounting write-down: NOK 120,000.
Tax obsolescence is stricter
Here the rules differ, and the difference surprises many. For as long as the business still owns the goods, it normally cannot write down the tax value simply because they have fallen in value or become hard to sell. The accounting and tax stock values therefore diverge, and the difference is a temporary difference. You get the write-down in the accounts without getting the deduction in the tax – yet.
Scrapping and shrinkage
Once goods have actually been destroyed, thrown away or are no longer owned by the business, they should not be in the stock. Material discrepancies should be documented, particularly for shrinkage, theft or larger write-offs. Undocumented stock shrinkage is one of the items that most often becomes a topic on an audit.
Self-produced goods
The accounting production cost normally includes both variable and fixed production costs. Small entities can use the simplification where fixed production costs are excluded. The tax production value is narrower and covers direct production costs: raw materials, semi-finished goods, auxiliary materials, direct production power and fuel, production wages with the related holiday pay, employer's contributions and pension, and certain direct production services. Example: 1,000 finished items, direct cost NOK 400 per unit and fixed production costs NOK 200 per unit. Accounting value at full production cost: NOK 600,000. Tax direct production value: NOK 400,000. The difference of NOK 200,000 is normally a tax-increasing temporary difference.
Retention
Stock count documentation is normally kept for five years after the end of the financial year – see Retention of accounting records We can set up stock count routines, reconcile the inventory and handle the valuation and the tax treatment.
Read more
This is general guidance, not advice on your specific case. Deadlines, rates and amounts change – always check the current rules, or get in touch with us.
More on year-end close and reporting
- What has to be done in the year-end close for a company and a sole trader?
- Statutory audit – when can an AS opt out of an auditor?
- The tax return for businesses – how does it differ from a personal one?
- The shareholder register statement – deadline, content and errors
- Depreciation – which groups and rates apply?
- Why is the result not the same as the money in the account?
- How long do accounting records have to be kept?
- The annual cycle for a Norwegian AS – which deadlines apply through the year?
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