Inventory Write-Down
A reduction in the carrying value of inventory when its market value or net realizable value falls below its recorded cost.
What is Inventory Write-Down?
An inventory write-down is required under GAAP (ASC 330) and IFRS (IAS 2) when the net realizable value (NRV) of inventory falls below its recorded cost. NRV is the estimated selling price minus any costs to complete and sell the goods. The write-down is recorded as a loss in cost of goods sold or as a separate impairment charge, reducing both the inventory balance on the balance sheet and net income in the period. Common triggers include obsolescence (fashion or technology goods), declining commodity prices, excess stock, and physical damage. Once written down, inventory cannot be written back up under GAAP, though IFRS does permit reversals if circumstances improve.
Example
An electronics retailer carries $50 million in smart home devices on its balance sheet at cost. A new product generation makes the existing models largely obsolete — estimated selling prices drop from $200 to $120 per unit, while the cost per unit is $150. Since NRV ($120) is below cost ($150), the company records a $30 per unit write-down. Applied across 500,000 units, the total inventory write-down is $15 million, reducing inventory to $35 million and reducing gross profit for the period by $15 million.
Source: FASB — ASC 330: Inventory