Accounting Best Practices, Fifth Edition

9–7. Follow a Schedule of Inventory Obsolescence Reviews

A great many companies find that the proportion of their inventory that is obsolete is much higher than expected. This is a major problem at the end of the fiscal year, when this type of inventory is supposed to be investigated and written off, usually in conjunction with the auditor’s review or the physical inventory (or both). If this write-off has not occurred in previous years, the cumulative amount can be quite startling. This may result in the departure of the controller, on the grounds that he or she should have known about the problem.

The solution is adopting and sticking to a schedule of regular obsolete-inventory reviews. This is an unpopular task with many employees because they must pore over usage reports and wander through the warehouse to see what inventory is not needed and then follow up on disposal problems. However, these people do not realize the major benefits of having a periodic obsolete-inventory review. One is that it clears space out of the warehouse, which may even allow for a reduction in the space this department needs. Also, spotting obsolete inventory as early as possible allows a company to realize the best salvage value for it, which will inevitably decline over time (unless a company is dealing in antiques!). Further, a close review of the reason why an inventory item is in stock and obsolete ...