Stock-Takes - The Time to Plan Them is Now - What You Need To Know
Baker Tilly Czech Republic's managing director offers some advice on inventory accounting
This is a sponsored article provided by Baker Tilly.
This article is written in British English, which for the matter under review means that Americans working here in the Czech Republic could be confused as the words are slightly different -- when we talk about taking stock, or the stock-take, what we are referring to in good American would be your periodic inventory count, and nothing to do with what we call "shares" and we're not actually literally "taking" them anywhere, we're just taking a count of them. I'll try and keep the rest of the English as international as possible. The law quoted here is Czech law unless otherwise stated, so this is reading which should be helpful for foreign people doing business in the Czech Republic where the businesses contain stock, or inventory.
Not every business's balance sheet (or "statement of financial position" as it is called these days) necessarily contains any stock at all -- service companies where all the services are performed in a short space of time, like a hairdresser or a taxi firm, would not normally have anything at all in the stock position. Service businesses where the services are performed on a long-term contract basis should normally have long-term contract work-in-progress if the contract has been partly performed by the year end, and this needs measuring too, but this particular article won't go much into that -- it needs a separate treatment.
So what I am writing about today is for businesses which either produce from components or materials (or which simply buy and resell) physical items. These companies, if they are operating under Czech law by dint of being in the Czech Republic, are obligated to perform stocktakes.
Briefly, then, here's what Czech accounting law imposes on business with stocks -- it is ponderously written and does not translate easily, but basically says the following:
Each accounting entity must take a count of each kind of stocks/inventory at least once per accounting period if they are using perpetual inventory (this means a system tracking additions to and subtractions from the stock account, rather than making writing them to purchases and correcting based on a stock-take, as is common with smaller businesses). If they are not using perpetual inventory systems, then they need to get as close as they possibly can to documenting physically all the stocks (and fixed assets for that matter) and record the results in stock-take lists (which must be treated as an accounting record and kept with the other accounting records for at least five years)
It is better to do it on the balance sheet date, but if this is not possible, then it is permissible to do it in the course of the preceding four months or the following month (this is relatively relaxed legislation, I should add, by East European standards) but then you must reconcile the position between when you did the stock-take and the end of the year, and not every business will find that easy to do. It is a lot of extra work for you and your auditor, and might push up your costs. Therefore, much as everyone hates doing this around Christmas and New Year, when people want to be at home relaxing with their families, and when travelling to them sometimes means driving through difficult weather, but it is worth doing it at that time unless you really can't.
You have to then adjust for the differences in the books. Which means that if the actual amount you have physically on the shelf or in the yard is different to what's in your accounts, you change the accounts. There are more details on this in Czech Accounting Standard for Entrepreneurs 007.
That is a summary of what the law says, rather than a quotation of it, but if you want to know more, the places to look hardest at are sections 29 and 30 of the Czech Accounting Law. Among other things it will tell you the minimum information you need to have in the stock sheets.
Now some people say, "But I am making my accounts under IFRS (International Financial Reporting Standards), and IFRS doesn't say anything about stocktaking. Does this mean that I don't need to do it?" This was a question actually asked to me by a client, and I'm sure not only that person had an issue with this, because it's a strange fact that IFRS really doesn't get into detail about stock-take frequency, timing and method. IFRS only concerns itself with valuation principles for stocks. It doesn't even attempt to include within its scope the way of ascertaining the facts about how much stock the business has. This is therefore like asking "do I really need to keep accounts at all?" because IFRS doesn't give you any recommendations for bookkeeping packages, either. As to the facts of what the business has, IFRS assumes you have systems in place to ensure the recording of all facts, including a system for stock taking as required by the precise nature of your business. And then you need to remember that IFRS itself states that in all matters not covered by itself you are referred back to your country's laws, so there's no getting round the obligation if you are a Czech-based company performing accounts, whether to IFRS or to national standards.
Incidentally, the fact that IFRS doesn't talk about stock-takes doesn't mean that they are not important. On the contrary, for business owners they are one of the most crucial controls you need to perform. If your stock is made up of things that employees or others could easily physically remove and sell, or consume, then you need to have implemented a system that checks the physical levels all the more frequently.
In my experience one of the largest areas that can be misstated in accounts is indeed the stock, and also since stock is linked to both the sales and the purchase or production cycles, almost all the main things that can go wrong in accounting will affect the stock figure and will show up more easily if you take good care over the stock counting and do it with appropriate frequency.
Inventory is also one of the more complex areas in business to account for, as (unlike the monetary items such as debtors and cash, which are simply denominated in value only), you need to keep both the volume and also the value information and to that end most businesses with sizeable stocks run special warehouse programs to keep track of stocks and manage such matters as goods-received notes and goods-issued notes, reordering, and these systems often interface with the main accounting system showing the amount of stocks purchased against creditors for the given period and sold against debtors also.
For stock accounting, an evidential or standard cost is often used, enabling the system to concentrate on the issue of volumes, and a system for allocation of deviations between actual cost and the standard costs.
In my experience the area is found difficult to get right by businesses, and where issues do occur in audits or errors appear which are of a size that could entirely upset the usefulness of the financial statement, more often than not it is precisely in the area of stocks, and a properly conducted stock-take could have helped avoid the problem. In many cases, years of sloppy stock-takes failed to spot a problem until it became critical.
That having been said, let me give you some pointers on best practice for getting the most out of your stock-take. I can't write too much in an article, but these are some of the gems I have gleaned from lengthy practice:
• Always write the amounts from life, from the real stock, and only then compare it to the figure in the system. Get the system to print the stock cards with only the items and locations and not the expected amounts in there. In some countries, like Poland, that's obligatory by law. In the Czech Republic it isn't, but still it is best practice, as otherwise you will notice that employees doing the count may start to work less carefully and allow the amount in the system to suggest to them the amount they are seeing. That is actually basic psychology of perception.
• Have the person doing the writing different to the person running around doing the counting, and have the person responsible for the custody of stocks present but not responsible for the count. This is good governance, as well as practical from the point of view of speed of the exercise.
• If you have permanent inventory, and are therefore allowed in Czech law to have your full stock-take at any time of the year, not just in the five month window available to other businesses, the most sensible time to choose is the one where stock is expected to be at its lowest. This is the point in the year when any systematic errors in the system will show up most clearly -- in fact it's impossible to miss if the system is telling you that you still have 12 tonnes of coal and the bunker is actually nearly empty!
• Keep track of the locations that the stock was in, and if possible avoid any movements of stock for the whole period of the count. If it is not possible to prevent movements of stock during the take, then it will be necessary to mark the stocks already counted. A note should be kept of the system used and the whole team or teams briefed about it prior to the count.
• If your company should be audited, then it is important for the auditor to be present at the stock count. His or her role is one of observer, they are not responsible for the count, they are there to check that it is being done in an orderly way so as to be able to rely on the results of it. They may need for the audit to test-count again a sample of positions on the sheets. Be ready for this and be sure that the auditor is invited to the count. Their experience may also be useful if queries arise.
• If your company is not being audited, you can ask an audit firm just to attend the stock-take to ensure that it is doing its job of protecting your company and fulfilling the law. This procedure is available from auditors even without any full audit or review and can usually be offered at a good value price. Auditors will be able to suggest improvements to your system which can make the result better in the future, possibly for less work on the part of the stock-counting team.
• You must look out for obsolete, aging, slow-moving and damaged stocks to which an adjustment may need to be created or which may need to be written down. Take the opportunity to measure that the stocks are held in spaces at the right temperatures, shade levels and humidities for them, being drawn on in the right order so that they don't cross their useful lives, and that adequate firefighting tools are at hand. Have a mind also that they are not stacked hazardously whereby they can fall and injure someone. Be sure your employees are equipped with -- and are really using -- the clothing and equipment needed to keep them safe as they handle stocks. This is not the central purpose of a stock-take, but a good business manager considers these things at all times.
• In these days of digital photography, where additional photos don't cost anything noticeable, you may find it improves the process and the evidence to keep a set of photos and/or a film of the items counted. This would be in addition to the count sheets, as it's the count sheets which are expressly needed under Czech law.
Some of the more difficult items to count, which need a bit of thought beforehand are:
• Pourable solids -- usually these are things like coal, coke, wood chippings, etc., which are left outside on yards in rough pyramid shapes. They can be, in certain manufacturing businesses, huge volumes which are not practical to be moved into standard geometrical shapes and sometimes they need you to bring in a geodesic specialist who will help you on the day to establish the volumes. You also need to weigh what a standard cubic meter of the product is actually weighing and take account of moisture, following norms in the various industry books.
• Stocks held away from your own premises may not be able to be counted by your people -- you need to ask for a return to be made stating the amounts held on consignment for you and independently verified, maybe by a local auditor.
• Stocks kept in the open air may be covered in snow at the calendar year end and this can make them more difficult to count or measure.
In addition to this, low temperatures may freeze gauges making it not possible to read off the levels in fluid tanks held outside. I once had to delay the stocktake of apple concentrate held outside in large metal tanks with external tube gauges from January until March, as the whole system froze over, and the first days above zero that year were in March.
Heavy items. Ensure that enough forklift drivers will be on hand if access to stock depends on them. Sometimes heavy lifting equipment is required, and the stocktake then fails if nobody remembered to book the person who operates the lifting equipment.
That is basically all I have space for, although in theory we could right a book on this if we thought anyone would like to read it! In conclusion, then, don’t be tempted to cut corners on the stocktake, though. You’re probably paying good money for a bookkeeper or a bookkeeping team to get your accounting right, and yet it will only be right if you make a good job of the inventory and the money you spent on the bookkeeping could all have been spent in vain. You can refer to your existing auditor or to our Firm for advice for your particular case if you’re not sure. Accountants are always happy to see clients taking this area with due seriousness. If you need to discuss any aspect of this article, do get in contact, and the first consultation – which may be all you need – is free from our firm.
For contact details, see Baker Tilly Czech Republic's Prague Directory listing.
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