BIM33015 - Stock: meaning of: what is stock

Meaning of stock

The stock of a trade can be anything acquired with a view to reselling at a profit. The term ‘inventory’ is sometimes used as an alternative to the term ‘stock’ in accounts prepared in accordance with GAAP. The two terms are equivalent and interchangeable.

In accounts prepared in accordance with UK GAAP (BIM31000) inventory (or stock) should be classified as:

  • raw materials and consumables,
  • work in progress (BIM33020),
  • finished goods and goods for resale,
  • payments on account.

The guidance in this chapter refers to FRS 102 Section 13 Inventories and Section 23 Revenue.

Related standards under other frameworks are:

FRS 105 Section 10 Inventories, Section 18 Revenue

IAS: IAS 2 Inventories; IFRS 15 Revenue from Contracts with Customers

Old UK GAAP: SSAP 9 Stocks and Long Term Contracts; UITF 40 Revenue Recognition and Service Contracts

The guidance in FRS 105 Sections 10 and 18 are substantially the same as FRS 102 Sections 13 and 23, although some differences in approach exist (e.g. in respect of agricultural produce.)

Circulating capital and fixed capital

The stock of a trade will consist of any asset, whether tangible or intangible, which is acquired with the intention of resale at a profit. It is important, from the viewpoint of determining the amount of a businesses profits, to distinguish between stock, sometimes described as ’circulating capital’, and the ’fixed capital’ of the business.

Viscount Haldane in John Smith and Son v Moore [1921] 12TC266, said: `fixed capital is what the owner turns to profit by keeping it in his own possession, circulating capital is what he makes profit of by parting with it and letting it change masters.’

Millet LJ referred to the distinction between fixed and circulating capital in the case of Vodafone Cellular Ltd & Others v Shaw [1997] 69TC376. He described `a commodity which is turned over or exploited in the course of a trade at a comparatively early date’ as having the characteristics of circulating rather than fixed capital.

The vital point here is that the intention must be to sell the asset to make the profit. For example zoo animals are not stock, because the trade is to exhibit those animals and not to sell them. Zoo animals are fixed capital assets (and the majority qualify for capital allowances as plant). A different example would be a business that makes and installs fitted kitchens and has a display area at its premises. From time to time it sells the kitchen units which have been on display. They are sold below normal retail price but well above cost. Here the intention is to make a profit from the kitchen units and the fact that a unit has been used for display purposes for a while does not mean that it is not trading stock. For a discussion of the treatment of stock where the trade includes hiring assets see BIM33040.

Guidance on the scope of a trade and how that influences what is stock is at BIM21000 onwards.

Whether an asset is on trading account depends on the trader’s intention. What does the trader intend to do with the asset? This will initially determine whether the asset is trading stock or a fixed capital asset. But intentions can change, and if they do then the asset will change its status from trading stock to fixed capital or vice versa. There is a clear discussion of these principles in Lionel Simmons Properties Ltd (in liquidation) and Others v CIR [1980] 53TC461.