Demarcation of stock and work in progress
In the tax statement of assets stocks are distinguished from work in progress. The difference between work in progress and stock is in the nature of the assignment. Work in progress is when activities are commissioned by the buyer. In stock items are simply produced for which no contract has been agreed.
New valuation of work in progress
As of 1 January 2007 a new valuation scheme for work in progress has applied. From that date rolling profits must be taken each year on the portion of the work in progress that is produced in that year. Previously, the valuation of work in progress fell directly under a so-called reasonable commercial use article. With the advent of the new regime, this is no longer the case.
What has changed?
The cost of the work must include any directly attributable costs, such as wages, materials, overheads and depreciation of used machinery, energy and support services. The constant part of the general costs, such as labour costs of general management and housing, must also be included in the valuation, and (a proportion of) the profit has to be capitalised.
The profit on the work in progress must be taken on a rolling basis, you cannot wait for profit taking until the work or the contract is finalised. If a job is half ready, half of the agreed price must be capitalised at that time. This capitalisation then leads to profit-taking on the capitalised part.
Valuation of stock
Stock is still valued on the basis of the rules of good business practice. The main rule of good business practice is that the income and expenses are as allocated well as possible to the years to which they relate. The possible valuation methods with good business practice are
- Valuation at cost (i.e. the purchase price or production cost of internally produced stock)
- Valuation at lower of cost or market value
- The LIFO system (last in, first out), under which most recently received stock is sold first
- The iron stock system. Price increases are excluded from profit and price falls have to be taken into account and are charged to profit
- The FIFO system (first in, first out), in which the stock first received is first sold
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