Inventory provisions: write-down versus write-off

A brand shows a healthy gross margin every month. Cash keeps getting tighter. Inventory days keep climbing. Nothing in the profit and loss statement explains it. Then one quarter a large charge appears, the margin collapses in a single period, and the board asks why nobody saw it coming.

Somebody did see it. It was sitting in the ageing report the whole time. It was just never reflected in the value of the stock on the books.

One thing needs stating plainly first. Accounting policy, the standards you report under, and the tax treatment of stock that is written down or destroyed vary by entity, framework and circumstance. What follows describes the mechanism and the questions to ask. The policy, the rates and the treatment must be agreed with your own finance team and auditor.

What a provision is and what it is not

A provision for slow moving or obsolete inventory reduces the carrying value of stock you still physically hold. The units stay on the shelf. They stay in the physical count. What changes is the value at which they sit on the balance sheet, and the reduction is recognised as a charge in the profit and loss statement.

The underlying idea is straightforward. Inventory is generally carried at the lower of what it cost you and what you can realistically get for it. Realisable value is not the selling price. It is the expected selling price less the costs required to actually achieve that sale, which for an Indian D2C or marketplace brand means platform commission, fulfilment and shipping, any markdown needed to move it, and disposal cost on whatever does not sell.

What a provision is not matters just as much. It is not a cash movement. It is not a decision to destroy anything. It is not permission to stop selling the stock at the best price you can get, and a provisioned unit that later sells well is a good outcome. It is also not a substitute for the operating work of marking down and clearing.

Write-down and write-off are different events

A write-down reduces value while the unit remains an asset you own and intend to sell. A write-off removes the unit from the books entirely, because it is expired, damaged beyond sale, destroyed, or otherwise has no realisable value at all.

The distinction matters operationally because the two carry different evidence trails. A write-down needs a valuation basis. A write-off needs proof that the unit is gone or unsellable, usually destruction certificates, disposal records or a documented scrap process, plus an approval trail showing who authorised it.

Whether a write-down can be reversed if conditions improve depends on the framework you report under and on your own stated policy. The treatment of goods that are destroyed, including any consequences for input tax credit already claimed on them, is a specific question with specific conditions. Both belong with your finance team and auditor, not with general reading.

How ageing buckets feed a provision policy

The ageing report is the input. The provision policy is the rule that converts it into a number, applied consistently so that the result is not renegotiated every quarter.

The structure looks like this. Stock is grouped by category, because an expiry dated food product, a seasonal apparel line and a long life hardware accessory do not lose value on the same curve. Within each category, the ageing buckets from the operational report become the rows, and each row carries an assessment approach agreed in advance.

The critical discipline is where the rates come from. They should be derived from your own realised recovery. Take the stock that actually sat in each bucket over recent quarters and look at what it eventually sold for after markdown, net of the cost of selling it. That history is the defensible basis. A number borrowed from another brand, or picked because it sounds prudent, is neither evidence nor policy. Agree whatever basis you arrive at with your auditor and apply it consistently, because inconsistency is what turns a reasonable estimate into an audit finding.

Overlay specific triggers on the general matrix. Stock below the minimum remaining life platforms accept. Discontinued lines. Packaging made obsolete by a labelling change. These need individual assessment whatever bucket they sit in.

Why an unprovisioned pile flatters gross margin

The mechanism is simple, and it is why this matters to operators rather than only to accountants.

Cost of goods sold recognises the cost of units that actually sold. Units that did not sell stay on the balance sheet at full cost. So a business that bought badly reports the same gross margin as one that bought well, because the mistake is parked in the asset rather than expensed. The statement stays clean until the stock is finally written off, at which point a year of accumulated error lands in one quarter.

The damage is not only in the reporting. Pricing gets set on a margin that is not real. Marketing spend gets justified against a contribution number that assumes stock is worth cash it will never fetch. Investor updates and lender covenants are built on an inventory figure that includes goods nobody wants. And the buying team, seeing no penalty in the numbers, buys the same way again.

The tell is visible without any accounting work. Gross margin holding steady, cash conversion cycle stretching, inventory days rising quarter on quarter. That gap between reported profitability and cash reality is usually the provision you have not taken.

What an auditor will ask for

Have these ready before the request comes.

• The ageing report at SKU or batch level, showing goods receipt dates, quantity, landed cost and location.
• The written provision policy, including the basis of realisable value and the evidence behind it.
• Realised recovery data supporting the rates, meaning what old stock actually sold for after cost of sale.
• A movement schedule for the provision. Opening balance, charge for the period, utilisation against stock actually disposed, any reversal, closing balance.
• Physical verification results and reconciliation of counts to book quantity, including differences and how they were treated.
• Confirmations for stock held at third party locations, meaning 3PL warehouses, marketplace fulfilment centres and platform distribution centres, since a material share of your inventory is not in your building.
• The approval trail for every write-off, with the authorising person and the supporting evidence of disposal.
• Evidence that the policy was applied the same way as the prior year.

One test is worth applying before any of this. The ageing report given to the auditor and the ageing report management uses on a Monday morning should be the same document. If they differ, that difference is the finding, and it is usually a bigger problem than the provision itself.

A provision does not fix anything. It makes the books honest about a problem that already exists. The fix is upstream, in measuring age properly and marking down while the stock still has value.