Books your bookkeeper can file: stock valuation under IFRS for SMEs

Which framework applies to you

The Financial Reporting Proclamation No. 847/2014, with Regulation No. 332/2014, established the Accounting and Auditing Board of Ethiopia and made IFRS the required reporting framework. It does not apply the same standard to everyone:

• Publicly accountable entities — banks, insurers, government-owned entities and other financial institutions — apply full IFRS.
• Entities classified as SMEs apply the IFRS for SMEs Accounting Standard.
• Micro enterprises fall outside the proclamation's scope entirely.

The classification criteria are set by the Board, which updates them from time to time — partly because Ethiopian SMEs have found the standard demanding in practice. So the question of which framework you are in has to be checked against the current criteria rather than a threshold someone remembers from a few years ago.

Lower of cost and net realisable value

The measurement rule for inventory is short: the lower of cost and net realisable value. Net realisable value is the estimated selling price less the costs still to be incurred to sell it.

This is where dead stock stops being an operational annoyance and becomes an accounting entry. If you hold 240 units that cost 750 birr each and the only realistic way to move them is a clearance at 600, the inventory is carried at 600 and the 150 birr difference per unit is a write-down in this period's profit — whether or not you have actually discounted them yet.

FIFO or weighted average — and not LIFO

Cost can be assigned using first-in-first-out or a weighted average cost formula. LIFO is not permitted. Any system offering it as an option is offering you a non-compliant answer.

The choice between the two permitted methods is not cosmetic. Suppose you buy 100 units at 200 birr, then 100 more at 260 birr, and sell 120.

Same purchases, same sales, same cash — and a 2,400 birr difference in reported gross profit, with the mirror-image difference sitting in closing stock. Under rising prices FIFO reports more profit and a higher balance-sheet value; weighted average smooths both.

It is a policy, not a setting

Because the method changes reported profit, it is an accounting policy. That means three things: it should be chosen with whoever signs your accounts, it should be disclosed, and it should not be changed because a new system defaulted to something else during a migration.

That last one is the common failure. A business moves from a spreadsheet running rough FIFO to software defaulting to weighted average, nobody mentions it, and the following year's figures are not comparable to the previous year's for reasons that take an auditor a week to find.