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Excess and obsolete inventory is stock a business holds beyond expected needs or can no longer sell or use at its recorded cost. It creates two separate questions: what value the inventory can still recover, and what the business should do with it. In 2018, accounting treatment depended on the applicable framework and inventory method; operationally, regular review helped surface stock that might be reused, sold, returned, or disposed of.
What excess and obsolete inventory means
Excess inventory is stock in quantities beyond expected demand or operational need. Obsolete inventory is stock that has lost usefulness or marketability, often because of damage, product changes, or technology shifts. The terms can overlap: stock may be excess before it becomes obsolete, while an item may become obsolete even if only a small quantity remains.
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Neither label alone determines an accounting value or a disposal decision. A business needs evidence about likely sale or use, costs required to complete or sell the item, and possible alternatives such as reuse or return.
How inventory should be valued
Under IAS 2
IAS 2 says inventory is measured at the lower of cost and net realisable value (NRV). NRV is the estimated selling price in the ordinary course of business, less estimated costs of completion and the costs necessary to make the sale. Cost may no longer be recoverable when inventory is damaged, wholly or partly obsolete, selling prices fall, or completion or selling costs rise. The purpose of a write-down is to avoid carrying an asset above the amount expected to be realised through sale or use. IAS 2, consolidated text.
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IAS 2 generally assesses and writes down inventory item by item. Grouping is permitted only in limited circumstances—for similar or related items that cannot practicably be assessed separately. A broad category-level write-down should not replace item-level assessment when separate estimates are practicable.
Estimates should use the most reliable evidence available at the time. Relevant evidence may include actual selling prices, expected selling prices, costs to complete and sell, and conditions existing at the reporting date. The standard does not turn one company’s forecasting checklist into a universal formula.
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U.S. GAAP context in 2018
A 2018 Sanmina Form 10-K described FASB’s ASU 2015-11 as replacing the lower-of-cost-or-market test with lower of cost and NRV for inventory within the guidance’s scope. The filing said LIFO and retail inventory method inventory were excluded from that scope. Sanmina reported that adopting the change at the beginning of 2018 had no impact on its financial statements; that company-specific result does not establish the impact for other businesses. Sanmina 2018 Form 10-K.
Businesses should identify which accounting framework and inventory-cost method apply before applying a valuation rule. The same inventory may be subject to different requirements depending on those facts.
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How to identify stock at risk
Use regular review rather than waiting for an event such as a warehouse move or product launch. Combine numerical signals with what staff observe in production, sales, and purchasing. Archived PCAOB audit guidance lists procedures such as reviewing turnover and anticipated demand, observing inventory, and discussing slow-moving, excess, defective, or obsolete items with relevant personnel. It is historical audit guidance, not a statement of current auditing requirements. PCAOB archived AU 326.
- Sales and usage: Compare recent sales and historic usage with quantities on hand; investigate items with little or no movement.
- Demand outlook: Compare current stock with forecasts and strategic plans, and examine whether those assumptions remain credible.
- Product and technology changes: Check whether new products, specifications, or technology have reduced demand for existing stock.
- Condition and costs: Identify damage or defects and estimate any added completion or selling costs that affect recoverable value.
- Cross-functional evidence: Ask sales and production staff about likely demand, substitutions, and practical opportunities to consume or reuse the stock.
One SEC-filed company described considering past sales experience, future sales forecasts, strategic plans, quantities on hand, historic usage, business levels, future prospects, new products, and technology changes when estimating an allowance. This is an issuer-specific example, not a prescribed checklist for every company. Its filing also cautioned that recovery through sales was uncertain. SEC-filed company report on excess and obsolete inventory.
Separate the valuation adjustment from the stock decision
A write-down changes the inventory’s carrying amount in the accounts; it does not itself move, sell, or dispose of the stock. Operational decisions should consider expected recoverable value and the costs, timing, and feasibility of each option. Depending on the item and business, options may include using it in production, transferring it to another location or team, selling it at a discount, returning it to a supplier, or disposing of it. An accounting estimate should not be confused with proof that an item has no practical use.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Why proactive review matters: a 2018 federal example
In a February 16, 2018 report, GAO examined personal-property management at the EPA, Forest Service, GSA, HUD, and IRS. It found that the five agencies generally lacked proactive policies or processes for identifying unneeded personal property, such as office furniture. Officials said they often identified it only after trigger events, including office-space reductions. GAO warned that a reactive approach could leave reusable property unidentified and make it harder to minimize unnecessary storage costs. This is a bounded finding about those five federal agencies and personal property, not a statistic about commercial inventory. GAO-18-257.
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A practical review sequence
- Set the scope: Identify the accounting framework, inventory-cost method, reporting date, locations, and stock categories to review.
- Find candidates: Examine aging, turnover, quantities, usage, forecasts, defects, and known product or technology changes.
- Test recovery: Estimate likely selling prices or value through use, then account for completion and selling costs using the evidence available.
- Assess at the right level: Estimate item by item where practicable; group only when the applicable standard permits it.
- Record the accounting result: Document the assumptions and evidence supporting any write-down under the applicable framework.
- Choose an operational disposition: Decide whether to reuse, transfer, sell, return, or dispose of the stock, and address storage or handling costs.
- Repeat the review: Make review part of the normal inventory process rather than relying solely on one-off triggers.
The cited sources establish no general industry-wide percentage or count of excess and obsolete inventory. Company disclosures and the five-agency GAO review are specific examples, not market-wide measurements.
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