Stock obsolescence

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Obsolete stock or stock obsolescence calculations are done by companies to determine how much of their stock on hand is unlikely to be used in the future.

The financial value of stock obsolescence that is calculated can be entered into a general ledger system to create a "stock obsolescence provision" which can reduce the tax liability of a company. For this reason, a systematic and auditable approach to designing a stock obsolescence report should be used. Estimation of stock obsolescence without any traceable calculations will probably not be acceptable to an auditor.

Typically, a stock obsolescence report uses the value of "stock on hand" as a starting point, and then reduces this value based on the potential that stock will be used up in the future. The higher the probability that stock will be used in the future, the more the on-hand stock value can be reduced. Sometimes a historical usage of the item can also reduce the value, in this case, the more recently the item was used, the more the on-hand value can be reduced.

The formulae that calculate how much the on-hand value can be reduced by may vary from company to company and are normally described in a general way in the GAAP (Generally Accepted Accounting Practices) for that company or country. For example one formula may be: "If there is any future usage of the item in the next 3 months then reduce the value by 100%, if there is usage in the next 6 months then reduce by 50%, and if it is only going to be used in a year's time then reduce by 10%, if it has been used in the past 6 months then reduce by 70%, if there has been usage in the past year then reduce by 30%".

Some formulae may also take into account the volume used e.g.: reduce the on-hand value by the percentage of product used in the past 6 months.

This information was used, with permission, from the following website: 'timelineforum: How to design a Stock Obsolescence Report'.

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