Valuing inventory and stock

For a trading or manufacturing business, inventory is often one of the heaviest items on the balance sheet, and also one of the trickiest to value. The value assigned to stock directly affects profit: overstating it inflates the result, understating it compresses the result and creates hidden reserves. The Code of Obligations sets the boundaries; the rest is method and consistency.

What inventory includes

Stock covers:

raw materials and consumables;
work in progress (semi-finished goods);
finished goods ready for sale;
merchandise bought for resale.

Each category must be valued on consistent criteria and documented: without a reliable inventory count, the valuation rests on nothing.

The basic principle: lower of cost or market

The Code of Obligations imposes the principle of the lower of cost or market value. Stock is recognised at acquisition or production cost; but if at the closing date the net realisable value (expected selling price less costs still to be incurred) is lower, it must be written down to that lower value.

This is the application of the prudence principle: foreseeable losses are anticipated, gains not yet realised are not. Obsolete, unsold, damaged or slow-moving goods must therefore be written down, not kept on the balance sheet at an unrealistic value.

What goes into cost

Cost is not just the price paid to the supplier. It includes:

purchase price net of discounts and rebates;
duties, transport and incidental charges up to entry into the warehouse;
for finished goods, the direct production costs (materials, labour) and a reasonable share of indirect production costs.

Distribution, administration and selling costs must not be capitalised; they remain operating costs.

Methods for determining cost

When purchases are made at different prices over time, a criterion is needed to establish which cost to assign to the remaining units:

FIFO (first in, first out): it is assumed that the goods bought first leave first; the remaining stock reflects the most recent prices.
Weighted-average cost: an average cost is calculated across all purchases, updated at each inflow.
Standard cost or retail price, admissible if they produce results close to actual cost.

The chosen method must be kept constant over time: changing it at will to shape profit conflicts with the required consistency. The LIFO method, common elsewhere, is not the benchmark practice in Switzerland.

The hidden reserve on stock

Swiss law allows a peculiarity: on top of justified write-downs, a lump-sum write-down of stock is permitted within a limit established in tax practice (the so-called “goods reserve”). It reduces the book value of inventory below its real value, creating a hidden reserve that compresses taxable profit.

It is a legitimate tool of tax prudence, but it must be managed with awareness: the reserve is released (becoming profit) when inventory shrinks, and it distorts the true reading of net assets. Those adopting true-and-fair-view standards (Swiss GAAP FER) may not create it.

Common mistakes

Not writing down obsolete or slow-moving goods.
Including selling and administration costs in the value of stock.
Changing the valuation method from one year to the next without reason.
Basing the inventory on estimates rather than a reliable physical count.

In summary

Stock is valued at the lower of cost and net realisable value.
Cost includes incidental charges and, for finished goods, production costs.
FIFO or weighted-average cost, applied consistently.
The goods reserve is a permitted form of tax prudence, but it must be monitored.

How we help you

We set up correct, consistent inventory valuation criteria over time, manage write-downs and the goods reserve in compliance with the Code of Obligations and with an eye to tax optimisation. Put your stock in order.