IVS 230: Valuing Inventory in Family Law Business Valuations

In many family law property settlements, businesses form part of the asset pool. While attention is often focused on the value of the business itself, one critical component is frequently overlooked, inventory.

Inventory can represent a substantial portion of a company’s assets. For manufacturers, wholesalers, retailers, and e-commerce businesses, inventory may account for a significant share of business value. If inventory is incorrectly valued, it can distort the entire business valuation and ultimately affect the fairness of a property settlement.

This is where IVS 230: Inventory, part of the International Valuation Standards, becomes important. It provides guidance on how inventory should be valued when determining the financial position of a business.

Understanding Inventory in Business Valuations

Inventory generally refers to goods held by a business for production or sale. This can include:

• Raw materials used in production

• Work-in-progress items still being manufactured

• Finished goods ready for sale

These categories are important because they affect how inventory is valued and how profit is allocated within the production process.

One of the key insights from IVS 230 is that the book value of inventory rarely reflects its true economic value. Accounting records typically capture historical costs, such as purchase price or manufacturing costs. However, the market value of inventory may be different because it reflects the value created during the production process and the potential profit embedded in the goods.

In family law disputes, relying solely on accounting figures can therefore produce misleading results.

Valuation Approaches for Inventory

IVS 230 explains that inventory can be valued using several valuation approaches depending on the circumstances.

Cost approach

This method often applies to raw materials. The inventory may be valued based on the cost to replace those materials at current market prices.

However, adjustments may be necessary. For example:

• Inventory may need to be adjusted to FIFO cost basis

• Market price changes may affect the value of raw materials

• Obsolete or damaged inventory may need to be written down

• Shrinkage caused by theft, damage, or miscounting may reduce value

  
  

These factors can significantly alter the true value of inventory.

Income approach

In some cases, the value of inventory is linked to the profit it can generate once completed and sold. This requires analysing the costs already incurred, costs to complete production, and the profit attributable to the goods.

Importantly, IVS 230 highlights that profit is not always proportional to costs. Businesses often derive value from processes, technology, brand strength, or customer relationships, which can influence the value of inventory.

Why Inventory Valuation Matters in Family Law

Inventory valuation can become contentious during divorce proceedings involving businesses.

Common issues include:

• Overstated inventory values in financial statements

• Large quantities of obsolete or slow-moving stock

• Inventory recorded at cost rather than market value

• Missing or inaccurate stock records

  
  

If inventory is overstated, the value of the business may be inflated. Conversely, undervalued inventory may reduce the asset pool unfairly.

For family law matters, the court requires an objective and defensible valuation. IVS 230 provides a structured framework that helps ensure inventory is assessed properly.

The Role of Forensic Accounting

Valuing inventory is rarely as simple as reviewing the numbers in the financial statements. A forensic accountant examines the underlying evidence to determine the true economic value of the stock.

DB Forensic regularly assists family lawyers and clients by:

• Analysing inventory records and stock reports

• Identifying obsolete or slow-moving inventory

• Adjusting book values to reflect market conditions

• Assessing manufacturing margins and embedded profits

• Ensuring valuations align with the International Valuation Standards

  
  

By applying the guidance in IVS 230, DB Forensic helps ensure that inventory is properly accounted for when valuing businesses in family law disputes. This provides the court and the parties with a clear and reliable picture of the business’s true value.

Ensure Inventory is Properly Valued in Your Matter

If a business is involved in your family law property settlement, the value of its inventory could materially affect the outcome.

Professional forensic accounting advice can help identify errors, adjust valuations, and ensure financial evidence presented in court is accurate and defensible.

Assess the True Value of Your Business Inventory