What is Inventory Write-Down?
An inventory write-down is an accounting entry that reduces the carrying value of inventory when its net realisable value (NRV) is lower than its cost. It is required by IAS 2 to ensure inventory is not overstated on the balance sheet.
How It Works
- Compare the cost of each inventory item or group to its NRV at the reporting date.
- Where NRV is lower, calculate the write-down amount.
- Debit cost of goods sold or a dedicated inventory loss account.
- Credit inventory or an inventory allowance account.
- Reverse the write-down in a later period only if the original conditions no longer apply.
Saudi Context
ZATCA allows the write-down as a deductible expense for corporate income tax if it is documented and reflects a real decrease in market value. SOCPA-adopted IFRS requires disclosure of the amount written down and the circumstances that triggered it.
Example
A retailer holds SAR 100,000 of seasonal stock that now sells for SAR 60,000 after the season ends. The SAR 40,000 difference is written down: debit COGS SAR 40,000, credit inventory SAR 40,000.