UAE inventory must be valued at the lower of cost or net realisable value (IFRS IAS 2). Permitted cost methods: FIFO or weighted average — LIFO is not permitted under IFRS. Slow-moving or obsolete inventory can be written down to NRV — the write-down is CT-deductible in the period recognised. VAT on stock: no VAT on internal stock movements; VAT charged on sale to the end customer.
Inventory valuation methods in UAE
Under IFRS IAS 2 (which applies to UAE businesses), inventory must be measured at the lower of cost and net realisable value. Two cost methods are permitted:
- FIFO (First-In, First-Out): Oldest inventory costs are assigned to cost of goods sold first. Remaining inventory is valued at the most recent purchase prices. In a rising price environment, FIFO produces a higher closing inventory value and lower COGS — higher profit.
- Weighted Average Cost: All inventory is valued at a weighted average of the cost of all units available. COGS and closing inventory both use the same average cost. More stable profit reporting when prices fluctuate.
- LIFO is not permitted: Under IFRS, the Last-In First-Out method is prohibited. UAE CT follows IFRS, so LIFO is not an acceptable method for UAE businesses.
Once you choose FIFO or weighted average for a category of inventory, you must use it consistently. Retail and FMCG businesses typically use FIFO (physical flow matches cost flow). Bulk commodity businesses (building materials, chemicals) typically use weighted average. The method must be disclosed in the notes to the financial statements.
VAT on inventory movements
- Purchasing inventory: Input VAT is recoverable on inventory purchases if the inventory will be sold in standard-rated or zero-rated supplies. Post: Debit Stock / Debit Input VAT / Credit Accounts Payable.
- Selling inventory: Output VAT is charged on the sale price. Post: Debit Accounts Receivable / Credit Sales / Credit Output VAT.
- Internal stock movements: Moving stock between warehouses or between free zone and mainland involves no VAT — these are not supplies. However, a designated zone to non-designated zone transfer may trigger deemed supply rules — take VAT advice if your business moves goods between zones.
- Samples and gifts: Giving stock away as samples or gifts is a deemed supply — output VAT must be accounted for on the cost of the goods. Exception: advertising samples with no commercial value.
- Write-off / destruction: When inventory is destroyed or written off, it is treated as a deemed supply — output VAT is due unless the goods are destroyed in the presence of a Customs or FTA-approved official who signs off the destruction.
Inventory write-down — CT treatment
When inventory is written down to its net realisable value (NRV) below cost — for slow-moving, damaged, or obsolete stock — the write-down is recognised as an expense in the period.
For UAE CT purposes: the write-down to NRV is a deductible expense in the period recognised, provided it is calculated in accordance with IFRS IAS 2. Reversal of a write-down (if NRV recovers) is a taxable income in the period of reversal.
Inventory records not matching the physical stock count?
We manage UAE inventory accounting — purchase posting, COGS calculation, VAT treatment, and periodic stock reconciliations. Fixed monthly fee.
Frequently asked questions
Can UAE businesses use LIFO for inventory valuation?
No. LIFO (Last-In First-Out) is prohibited under IFRS IAS 2, which is the accounting standard used for UAE CT purposes. UAE businesses must use either FIFO or weighted average cost methods. Using LIFO in the accounts would be a departure from IFRS and not acceptable for CT return purposes.
Is there VAT when goods are written off in UAE?
Destroying or writing off inventory is treated as a deemed supply under UAE VAT Law — output VAT is due on the cost. Exception: if the goods are destroyed in the presence of a Customs or FTA-approved official and documented destruction is confirmed. Keep destruction records to support any VAT exemption claim.
How does a closing stock count affect UAE CT taxable income?
If closing inventory is lower than calculated (stock count reveals shrinkage or loss), the adjustment increases COGS and reduces profit — reducing taxable income. The opposite applies for over-stated closing stock. Accurate physical counts are therefore a CT compliance matter, not just a stock control matter.
Can UAE businesses deduct slow-moving inventory write-downs for CT?
Yes — write-downs to net realisable value (NRV) are deductible expenses under UAE CT Law, provided they are calculated under IFRS IAS 2. The basis for the NRV estimate (selling price less estimated costs to complete and sell) should be documented.
What VAT applies when UAE businesses give away product samples?
Giving away product samples is a deemed supply — the business must account for output VAT on the cost price of the samples. Exception: where the samples have no commercial value (e.g., tiny trial sachets). For most UAE businesses, the safest approach is to account for output VAT on all product giveaways and reclaim input VAT on the original purchase cost.