Writing off obsolete inventory.
ASC 330 mandates lower of cost or net realizable value. The book write-off is straightforward; tax timing is not. The entry itself lifts the ratio.
When inventory is obsolete
- Net realizable value falls below carrying cost.
- Aged beyond the SKU's commercial life (last 24 months without movement is a common trigger).
- Physical damage or regulatory restriction blocks sale.
- Replacement model has shipped (electronics, fashion seasons).
Book vs tax
Book write-down to net realizable value is required at each reporting date under ASC 330-10-35. For tax, IRS Publication 538 permits a deduction only when the inventory is sold, scrapped, or donated. The book and tax timing therefore differ; track a deferred-tax temporary difference.
The ratio effect
A write-off lowers the denominator (average inventory) immediately and adds the loss to COGS in the period. The combined effect typically lifts the trailing-twelve-month turnover ratio by half a turn on a $600,000 inventory book carrying a $40,000 write-off. The lift is real, not cosmetic.
Audit documentation
- Aged-stock report at the reporting date.
- Net realizable value support per SKU (recent sale, third-party quote, scrap-value estimate).
- Memo identifying the trigger event and the write-down amount.
- Board minute approving the entry if the amount is material.
Write off obsolete
ASC 330 lower-of-cost-or-NRV; track book vs tax; lifts the ratio.