What is Inventory Obsolescence?
Inventory obsolescence occurs when items in stock can no longer be sold at their full carrying value because of changes in demand, technology, design, or expiry. It typically requires a write-down or a dedicated reserve account.
How It Works
- Run aging or slow-moving stock reports to identify candidates for obsolescence.
- Investigate the cause — model change, expired warranty, contractual change, market shift.
- Estimate the recoverable amount through discount sales, scrap, or alternative use.
- Book a reserve for obsolete inventory and reduce the net carrying value.
- Authorise final disposal and remove the items from the ledger when the loss is realised.
Saudi Context
Saudi consumer-goods and pharmaceutical businesses watched closely by SFDA must dispose of expired and obsolete inventory in line with sector regulations and record the loss in the same fiscal period. ZATCA accepts documented obsolescence reserves as a deductible expense.
Example
An electronics retailer holds SAR 200,000 of last-year mobile phones. Sales velocity dropped 80%, and the best remaining channel is clearance at 40% off. A SAR 80,000 obsolescence reserve is recorded.