Stock Write-Down

What Is a Stock Write-Down?

A write-down changes what the inventory is worth without changing what is there. The goods stay on the floor, stay available to sell, and stay in the records; what alters is the value attached to them, reduced to whatever they will now fetch. That distinction matters because it preserves the ability to sell the stock and to reverse the reduction if the market recovers, which a removal from the books does not.

Timing is what most often goes wrong. The reduction belongs to the period in which the value actually fell, not the period in which somebody eventually assessed it, so a business that reviews obsolescence once a year will systematically recognise write-downs late and overstate profit in the intervening periods. Because the judgement is one of the more elastic in a set of accounts, the evidence expected is specific: what comparable goods actually realised, offers received, or a documented assessment of the market, rather than a percentage applied by policy without reference to any of it.

Stock Write-Down Under Indian Law

Position: where net realisable value falls below cost, the shortfall is charged to profit in whichever period the value dropped. If the value subsequently recovers, the earlier write-down is reversed, capped at whatever was taken off in the first place, so book value can never climb past what was paid.

• For tax, valuing closing stock at cost or market value whichever is lower is a long-accepted method of arriving at real business profit, and the resulting reduction is not treated as a notional loss.
• Source: paragraph 28 of Accounting Standard 2 and paragraph 34 of Ind AS 2 on reversal; Chainrup Sampatram v CIT, 24 ITR 481, on the tax position.
• Note: a general provision computed as a percentage is treated very differently from an item-wise write-down supported by evidence of realisation, and the second is what survives scrutiny.

How Stock Write-Down Is Measured and Valued

The amount is the excess of carrying value over what the goods will now realise, computed per item.

• Take 1,200 units carried at 90 each, a book value of 108,000. The line has been superseded and the remaining outlet will pay 55 per unit, with 6 per unit to get the goods there.
• Realisable value is 49 per unit, so the write-down is 41 per unit, or 49,200 in total.
• Book value drops to 58,800 and the 49,200 hits the accounts as soon as the deterioration happened, rather than waiting for a sale.
• The goods remain in stock and remain saleable at the reduced figure, so selling them later at 49 produces no further charge.
• If the market recovers before disposal, the write-down can be reversed, but only up to the original 41 per unit, so the carrying value never climbs back above 90.

How Stock Write-Down Works in Practice

1. An indication arises that goods will not realise what they cost: ageing, damage, a superseded specification, a market price that has fallen, or a season that has closed.

1. Realisable value is established for the affected items, net of what it will cost to complete and to sell them, supported by evidence of what comparable goods actually fetched.

1. The shortfall against cost is computed item by item and charged as an expense in the period the value fell, not the period somebody assessed it.

1. The goods stay physically in stock and remain in the records at the reduced carrying amount. They can still be sold, and selling them at the reduced value produces no further charge.

1. At each subsequent reporting date the assessment is revisited. If the market recovers the reduction is reversed, capped at the amount originally written down so the carrying value never rises above original cost.

Stock Write-Down: A Worked Example

A Tiruppur knitwear exporter reduces the carrying value of unsold seasonal stock after a buyer cancellation.

Two features separate this from a write-off. Nothing leaves the racking, and the records keep carrying it at the lower figure, so they are still counted, still verified and still available to sell. And the reduction can be reversed if the realisable value recovers, though only up to the original cost, never above it. The reversal in the last row is the part most often handled wrongly: the Rs 9 lakh recovery is credited in the year the value returns, and the stock cannot be written back to a figure higher than what it cost, however strong the market becomes.

Common Mistakes With Stock Write-Down

Timing and evidence are where this goes wrong, rather than the arithmetic.

• Booking the charge when somebody got round to reviewing it instead of when the market moved, so every period in between reports a profit it did not earn.
• Reviewing obsolescence once a year, which guarantees late recognition by construction.
• Supporting the figure with a policy percentage alone, when what is expected is evidence of what comparable goods realised or what has been offered.
• Treating it as a removal and striking the goods out entirely, which forfeits both the chance to sell them and any later recovery if prices improve.
• Applying the policy differently in a difficult year, which produces a charge that measures the revision rather than the stock and is the first thing an auditor looks for.

Related Stock Audit Terms

Removing the goods entirely is the other response, and it works differently, so stock write-off is the entry to read next. Every other term in this cluster is listed in the the glossary, grouped by the part of the work it belongs to.