Key takeaways
- Unsold stock is cash that has been put on ice. The original cost is a sunk cost. The decision should compare the cash you would receive today with the cash you expect to receive in future, after holding costs.
- In the example, stock older than 180 days has a cost of THB 9 million but an NRV of only THB 3.8 million. Clearing it reduces DIO from 130 to 91 days.
- Destroying stock or selling it below cost requires verifiable evidence, to support both the accounting and the tax treatment.
Inventory in the warehouse is carried in the financial statements at THB 3 million, but if you sold it today you might actually receive only half. The other half did not disappear on the day of the stock count. It melted away bit by bit as products became obsolete, packaging changed or too much was bought as a buffer. It is like vegetables bought and never eaten in the fridge: the day you throw them away is simply the day you accept the truth.
Dead stock occurs in retail, F&B and manufacturing alike. The bigger problem than the goods themselves is that the company does not know how much it has, because the reporting system shows only the total inventory balance.
Start with inventory ageing
Ageing should be measured from the date of last sale or issue, not just the purchase date, because a new batch of a product that does not sell is still a problem. Split the data by at least item code, warehouse, age and expiry date. For F&B and products with a limited shelf life, expiry date matters more than age in the warehouse.
| Group | Characteristics | Initial action |
|---|---|---|
| Active | Sell or issue steadily | Manage the reorder point and safety stock |
| Slow-moving | Frequency is falling, but customers still buy | Reduce purchase orders and sell as bundles |
| Obsolete | Obsolete, formula changed, packaging changed | Set a clearance price and find other channels |
| Dead | No predictable demand, or expired | Sell as scrap, donate subject to conditions, or destroy |
Example: calculating NRV and the cash that can be released
Hypothetical example Annual cost of sales is THB 84 million and inventory at cost is THB 30 million. NRV is the expected selling price less selling expenses. The figures are shown by group for brevity; the actual calculation should be done item by item.
| Age (days) | Cost (THB million) | NRV (THB million) | Write-down (THB million) |
|---|---|---|---|
| 0-90 | 14.0 | 14.0 | 0.0 |
| 91-180 | 7.0 | 6.3 | 0.7 |
| 181-365 | 5.0 | 3.0 | 2.0 |
| Over 365 | 4.0 | 0.8 | 3.2 |
| Total | 30.0 | 24.1 | 5.9 |
In this example, inventory shown in the financial statements should be reduced to THB 24.1 million. Current DIO is 30 ÷ 84 × 365 = 130 days. If the entire group older than 180 days, with a cost of THB 9 million, is cleared, inventory falls to THB 21 million and DIO falls to 91 days.
| Cash from clearing the stock | THB million |
|---|---|
| Cash received from sales (NRV of the group older than 180 days) | 3.80 |
| Tax benefit from the loss of THB 5.2 million × 20%, if the company has taxable profit and the expense is deductible | 1.04 |
| Cash released | 4.84 |
Clear it today or hold on
The right question is not how large the loss is against cost, but which option leaves more cash.
Hypothetical example For the 181-365-day group, cost is THB 5 million and the net proceeds from selling today are THB 3 million. If held for another 12 months, there is a 40% chance of selling for THB 3.6 million and a 60% chance of selling for THB 1.5 million. Storage and insurance cost 6% of cost, and the discount rate is 8%.
Expected value of holding = [(40% × 3.6) + (60% × 1.5)] ÷ 1.08 - (5 × 6%) = 2.17 - 0.30 = THB 1.87 million
Selling today yields THB 3.00 million, THB 1.13 million more than holding, even though it looks like a bigger loss against cost. The probabilities are assumptions and should be tested with the sales team and actual sales history.
Accounting and tax points to watch
- Accounting: TAS 2 requires inventory to be measured at the lower of cost and net realisable value.
- Tax: The Revenue Code allows inventory to be valued at the lower of cost and market price, but the difference arising from an allowance recorded in the accounts may not be fully deductible for tax in the same period. Prepare a book-tax reconciliation and discuss it with the auditor before closing the accounts.
- Destruction: Revenue Department ruling Kor Kor 0706/5525 states that expenses from destroying goods are not prohibited under Section 65 tri (13) and (14), provided there is clear documentary evidence that the goods were actually destroyed. It treats Order Por. 79/2541 (1998) as recommended practice.
- Selling below cost: Ruling Kor Kor 0811(Kor Mor)/134 accepts the sale of deteriorated goods below cost when there is justifiable reason, with the goods inspected under the company's conditions, an authorised approver, and finance and accounting staff present as witnesses. Without justifiable reason, however, the assessing officer may assess at market price under Section 65 bis (4).
- VAT: The rulings above do not cover VAT. Check the VAT effect of each method with a tax adviser before proceeding.
Some types of goods, such as goods subject to excise tax or regulated by specific authorities, may need approval before they are destroyed. Always check the requirements for the type of goods first.
Stopping it from coming back
Clearing stock fixes only the old problem. You must also fix the causes, such as bulk buying for discounts without counting the sunk cost, launching new products with no plan to retire old codes, and forecasts built on target figures. An SKU review should look at both contribution and the capital tied up in each code, not just sales.
Next steps
- Prepare ageing by item code and warehouse, based on the date of last movement
- Physically count only the group older than 180 days, and record the condition of the goods
- Estimate NRV item by item, using prices actually achieved less selling expenses
- Compare the options of discounted sale, bundling, selling as scrap and destruction on a net cash basis
- Designate approvers, and keep photographs, witnesses and the item list every time
- Consult the auditor and tax adviser on the write-off and VAT
- Set a no-reorder rule for codes older than the limit, and report ageing every month