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Inventories have evolved; so must the way we think about value

23 April 2020

by Andreas Ohl, Chair of the IVSC Business Valuation Board The IVSC recently issued an exposure draft on the valuation of inventory.  Given that inventory is hardly an emerging asset class,…

by Andreas Ohl, Chair of the IVSC Business Valuation Board

The IVSC recently issued an exposure draft on the valuation of inventory.  Given that inventory is hardly an emerging asset class, one might wonder why the IVSC deemed it necessary to amend the standards.  The primary reason is that, due to changes in the economy, what comprises inventory has evolved quite significantly in recent years.

In the past, inventory consisted primarily of raw materials and the cost of the labor and manufacturing overheads needed to turn these materials into a finished product.  Today, for many products, these costs often represent only a small fraction of the selling price of the finished product.  This is because many products include embedded software, brands and other intellectual property.  This has perhaps unsurprisingly given rise to debate on how, when and to what degree this IP is part of the inventory.

A second question is what is the cost of the IP?  Is IP added at the beginning, uniformly throughout, or only at the end when the logo is attached to say, a sweater?  Taking the same example, is the cost of branding the sweater literally just the cost of the logo materials and the labor to sew it on?  If so, the value of a branded sweater is only marginally more than an unbranded sweater.  If on the other hand one believes the IP is embedded in the product, then the branded sweater has a value that is potentially many times that of the unbranded one.  At the end of the day, the question is whether the value resides solely in the brand intangible, or should the inventory value reflect the large difference between the retail selling price of the branded and unbranded items?

These questions and others are posed in the IVSC’s recently published IVS 230: Inventory‘ Exposure Draft, available to download on the IVSC website. The IVSC has issued a call for feedback to the consultation which closes on 30 June 2020.

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of the IVSC, operating in 137 countries worldwide. Join them.

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There are more than 200 member organisations
of the IVSC, operating in 137 countries worldwide. Join them.

Become part of a global network working to enhance valuation standards and professionalism.