The perpetual inventory and its compliance with tax legislation

The constant evolution of markets and the consequent increase in competition and competitiveness, coupled with ongoing legislative changes, impose numerous demands on companies. Therefore, efficient management of all resources plays a crucial role in the central objective of companies – profit generation. One example of the many resources to manage is inventory. Effective management of inventories can prevent costs associated with the acquisition and maintenance of excessive quantities, which, if not avoided, increase the risk of depreciation and obsolescence. Conversely, insufficient inventories at "key" moments can result in stockouts and, consequently, revenue loss.

In addition to the mentioned risks, we cannot overlook the significance of inventories in a company's assets, especially in certain sectors. Thus, it seems clear that proper inventory management plays a vital role in the development and financial efficiency of companies.

In this context, accounting assumes a crucial role in supporting management, especially during the implementation of inventory systems and valuation policies.

Accounting-wise, inventories are assets. According to the Conceptual Framework (CF) of the Portuguese Accounting Standardization System (SNC), assets are resources controlled by the entity as a result of past events from which future economic benefits are expected to flow.

Regarding assets, accounting standards impose additional criteria for their recognition and measurement, such as inventories. Therefore, it is important to note that inventories are assets:

a) Held for sale in the ordinary course of business;

b) In the process of production for such sale; or

c) In the form of materials or consumables to be used in the production process or in the provision of services.

Thus, when dealing with inventories, accounting records should allow for:

Knowledge at any time of the quantities and value of stocks held by the company; and
Determination of the cost of goods sold and consumed, and consequently, the result derived from sales or production. To achieve these objectives, it is possible to adopt either a perpetual inventory system or an intermittent or periodic inventory system.
In summary, the perpetual inventory system is a management method in which continuous and updated records of warehouse quantities are kept. The entity should theoretically be able to determine the value of existing inventories and make the corresponding accounting records "at any time".

Conversely, the periodic inventory system allows records to be made at fixed intervals.

In terms of legislation, there was an expansion of the entities required to adopt the perpetual inventory system during the 2016 period, resulting from the transposition of European directives into national law.

Currently, entities covered by the SNC or by international accounting standards adopted by the EU are required to adopt the perpetual inventory system. However, micro-entities and some sectors such as agriculture, service companies, and small retail are exempt from its adoption.

Micro-entities are defined as entities that, at the balance sheet date, do not exceed two of the following three limits:

Total balance sheet: 350,000 euros;
Turnover: 700,000 euros; and
Average number of employees during the period.
These limits refer to the immediately preceding period. If two of the three limits are exceeded in two consecutive periods, the entity ceases to be considered a micro-entity from the third period onwards.

According to the SNC, entities required to adopt the perpetual inventory system should follow these procedures in their accounting:

a) Conduct inventory counts at the end or throughout the period, on a rotating basis, so that each item is counted at least once;

b) Identify assets by their nature, quantity, and unit and total costs, in order to allow verification, at any time, of the correspondence between physical counts and their accounting records.

In the opinion of the Portuguese Accounting Standardization Commission (CNC), the perpetual inventory system is not an instrument integrated into the SNC, but rather a legal obligation applicable to entities applying the SNC.

The CNC also clarifies that the application of the perpetual inventory system in commercial accounting takes into account current practices in companies' reality. This practice may be based on extra-accounting records, which can allow control of the correspondence between accounting records and the values determined based on physical inventory counts. Thus, information for accounting records can be obtained through stock control and management systems (computerized or manual), sales expenditure documents (CMVMC), or summaries of documents showing the production cost of various products and work in progress that carry over to the next period, for the relevant period (month), and at the end of the year.

The CNC emphasizes that the periodicity of accounting records under the perpetual inventory system is not legally established and should consider the nature of the entity's activities and a cost-benefit analysis.

In this regard, the Tax and Customs Authority (AT) issued a circular letter stating that, for tax purposes, it is acceptable for accounting records to be made at least at the end of each month.

The Portuguese Corporate Income Tax Code also stipulates that delays in accounting execution exceeding 90 days from the last day of the month to which the operations relate are not allowed. It is worth noting that, according to the current structure for submitting the SAF-T (PT) Accounting file, it is possible to verify "after the fact" whether accounting records are being made under the respective conditions and deadlines.

Regarding physical counting, it is important to remember that entities with organized accounting and required to prepare an inventory must electronically transmit inventory data to the AT by January 31, for the last day of the previous financial year.

Finally, as a result of the publication of the State Budget for 2024, the Government has determined the exemption from the obligation to value inventories when communicating them for the 2023 tax period, for all taxpayers.

Additionally, regarding the 2024 tax period, only taxpayers obliged to use the perpetual inventory system are required to communicate inventory values.

Therefore, evaluating the adequacy of tax legislation in relation to the required procedures should consider companies' ability to comply with these requirements efficiently and effectively.