Obsolete Inventory Provision: When Unsold Stock Is Not an Asset

An obsolescence review covering cost, net realisable value, demand, completion cost, scrap, write-down, disposal and reversal evidence. The purpose is to turn an operational issue into a measurable exposure, reconciled evidence, an accountable owner and a dated closure.

What management should understand

• AS 2 measures inventory at the lower of cost and net realisable value.
• Net realisable value considers selling price less completion and selling costs.
• A matrix can guide review but should not override material item evidence.
• Write-down does not physically dispose of stock; custody, GST and approval controls remain.
• A reversal requires evidence of recovery and cannot exceed the earlier write-down.

The five-point control review

Practical example

Implementation workflow

1. Define the transaction and the decision

State precisely what is being measured or approved: a month-end balance, customer order, product cost, purchase, tax credit, payroll run, bank payment, investment or export document. Set the period, legal entity, business owner, reviewer and materiality. A control cannot work when the team is reviewing different transactions or dates.

2. Lock the source evidence

Collect the signed contract, approved master data, invoice, receipt, timesheet, inventory record, payroll file, portal statement, bank transaction or system log. Preserve the original version and document subsequent amendments. Official portals are important external records, but they do not replace the underlying commercial evidence or the books.

3. Reconcile value, quantity, date and identity

Match legal names, PAN or GSTIN where relevant, document numbers, quantity, amount, tax, due date, payment account and approval. Separate timing differences from errors and suspected fraud. An unexplained difference should remain open with an owner; it should not be forced into a suspense or miscellaneous account merely to complete the close.

4. Assess tax, payroll, cyber and contract boundaries

GST registration thresholds are not one universal number: the threshold for suppliers of goods can differ from services, and specified States can have lower limits. Compulsory-registration provisions, e-invoice history, e-way-bill rules, EPF or ESIC coverage and contract terms require separate analysis. Where insurance, guarantees or cyber cover are involved, the actual policy wording or instrument terms control the outcome.

5. Quantify the cash effect

Show the immediate payment or receipt, working-capital days, tax timing, finance cost and downside exposure. A transaction can be profitable in the accounts and still create a cash deficit. Use a base case and at least one stress case before accepting a large order, changing price, buying equipment or releasing a disputed payment.

6. Approve, execute and verify

The preparer should not be the only approver where master data, payment or statutory exposure is involved. Record the decision, exception reason and expiry. After execution, verify the live result in the bank, GST portal, payroll return, vendor master, inventory record or management report. A submitted request is not completion.

Action checklist

• Identify obsolete indicators.
• Estimate recoverable value.
• Approve provision or write-off.
• Control disposal and tax documents.
• Review reversals with evidence.

Evidence to keep

• Cost record
• Demand and selling-price evidence
• Completion/disposal costs
• Provision approval
• Disposal and reversal record

Warning signs

Finin2min takeaway