Provision for Obsolete Stock-Urgent

Hi there,

I am faced with a situation, in which I have to prepare Financial Statements for three consecutive years. As per available information, In the first two financial years, provision for the obsolete stock has to be provided. And there is no need to provide it in the third year.

In the first year, I debited the cost of sales by provisioned value and credited the Allowance for Obsolete stock in the balance sheet.

In the second year, I used the net of provisioned stock value from the first year and used it as opening stock in the P&L. And again as per the requirement, I debit the cost of sales and credited the Allowance for Obsolete stock in the Balance Sheet.

The company wants to keep the obsolete stock until a buyer agrees to buy it. However, it wants to keep it separate for the regular sellable stock and it was the sole reason to make a provision. Moreover, as per their assessment, there is no further need to provide for obsolete stock in the third and final year, as there is no outdated stock left.

My question is in the third year’s P&Lwhich opening stock value I should take? If it should be the last year’s closing stock less the provisioned value of the last year only. Or should I take the last year closing stock and subtract the cumulative provision of the two financial years?

Since, as per my observation, netting off cumulative provision value from the last year closing stock, and brought forwarding it in the current years P&L as opening stock will needlessly reduce the cost of sales and hence the GP.

Also, I have already gone through the explanation of IAS II, in the study text and some other articles, however, the majority of them are emphasizing on valuation and NRV, and I haven’t been able to find out any clear explanation, as to how the provision for stock obsolescence should be carried forward in the consecutive financial years.

There is also an issue of GP margin distortion. Most articles suggest that they should not be booked in cost of sales instead they should be treated as expense in the operating expense portion of the P&L. What actually IAS II suggests.

Regards,