Inventory Obsolescence Risk Review

A retailer has thousands of units that appear as assets, but their model is being replaced, so selling at full price is unlikely. Inventory obsolescence risk review asks what is physically held, what demand remains and whether the recorded value is supportable.

IFRS IAS 2 requires inventories to be measured at the lower of cost and net realizable value under that standard, and Oracle NetSuite describes practical signs of obsolete stock, including items that no longer sell or have become outdated. Accounting requirements vary by reporting framework, and an ageing report is a risk screen, not an automatic write-down formula.

Define the population to include finished goods, components and work in process as appropriate, excluding goods owned by others or recording them separately. Check physical stock by reconciling system quantity with counts, transfers and returns, because a risk review built on phantom quantities will overstate exposure.

Segment age by comparing receipt or production dates with expected sale or use, since one age cutoff cannot describe a seasonal product and a long-life spare part equally. Review movement, because low sales over a recent period may signal risk but planned projects can justify holding stock, so verify future demand evidence, and check seasonality with comparable seasons and storage-life evidence, since a product with no recent sales may still be needed next season.

Watch product changes such as new models, specifications and packaging that can make old versions hard to sell, and confirm whether customers still accept them. Check expiry, since food, medicine, chemicals and warranties can have strict dates and applicable safety and regulatory rules must be followed before any sale, and review condition, because damage, improper storage and quality holds can reduce realizable value even if the item is new.

Look at customer returns, as repeated returns or complaints can show an item is less saleable than its ledger balance implies, so separate unopened from unusable goods. Check market price, because a competitor's cheaper replacement or falling commodity price can affect expected selling value, and use evidence for comparable specifications.

Estimate selling costs, since net realizable value under IAS 2 considers estimated selling price less costs to complete and make the sale, so a headline price is not the final amount. Analyse components, because a spare part may be useful only for a product that is no longer supported, and check reservations, since stock earmarked for a firm customer order may be less risky than unallocated stock if the order is valid and its cancellation terms are confirmed.

Calculate a risk amount as quantity times carrying cost, which is an exposure ceiling for a simple screen, not the expected loss, and assess recoverable value item by item where material. Track age bands by value and report both count and currency amount, since a large number of cheap units may matter less than a smaller high-value obsolete part.

Separate accounting from action, because a write-down reflects expected recoverability but does not remove physical stock or solve storage congestion, and a financial allowance can change without a physical movement while a physical disposal needs its own approval and record. Review forecasts, since demand-planning error, promotional failure or late engineering changes may cause the build-up, assign ownership (finance owns valuation policy, operations confirms condition, product teams assess replacement and sales tests demand), document assumptions and the review date, and check future cash because unsold goods tie up space and cash and disposal may cost money; for an owner, the review asks whether inventory is useful and worth its recorded amount, not whether old stock is automatically worthless.