The Rise and Fall of Personal Protective Equipment
The media recently lambasted the Government for the £8.7 billion write down of Personal Protective Equipment (PPE) in the Department of Health and Social Care’s annual reports and accounts for 2020-21. But how did this £8.7 billion loss occur? Most of this was because organisations must record the value of stock in their annual accounts at the lower of what it was purchased for and its net realisable value (which is the sales price less the expenses associated with the sale of a product), even if this organisation has no intention of selling such stock.
We probably all remember the shortage of PPE early in the pandemic, the mad race for governments to buy it and the high prices paid - well, this all meant the cost price at purchase was much higher than what it would be bought and sold for some months later when supply chains improved and manufacturers could easily meet the unprecedented earlier demand.
It is the equivalent of buying a product for £10, struggling to sell it, the price falling, eventually accepting a net sales price of £8, and making a loss of £2. In accounting, even if the product has yet to be sold or used, this likely loss has to be recognised in an organisation’s annual reports by writing down the stock value to the lower of cost and the net realisable value on the last day of the period specified by the annual accounts.
It is one of the many rules companies have to follow when preparing annual accounts. It can be an expensive lesson to learn for those companies that buy lots of a product at its peak price but do not sell all of this product before the demand dwindles.
Fashionable products are most vulnerable to these large write downs but so, it would seem, is something as unflattering and staid as PPE.
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Auditing Team
Finance, Accounting and Economics Department
University of Wolverhampton Business School