stockprovision

Stock provision, also known as inventory provision or allowance for stock obsolescence, is an accounting estimate recorded to cover potential losses from inventory that may become obsolete, damaged, or otherwise unsellable. It helps ensure inventory is reported at the lower of cost and net realizable value and aligns with conservative financial reporting.

Recognition and accounting practice vary by jurisdiction, but the general approach involves establishing a contra-inventory allowance and recognizing an expense. On the balance sheet, inventory is shown at cost minus the allowance. In the income statement, the impact can appear as an obsolescence expense or as part of cost of goods sold, depending on policy and the nature of the write-down. Some entities prefer separate reserves, while others integrate the impact into COGS.

Estimation methods rely on factors such as aging of stock, demand forecasts, historical write-offs, and market conditions. Provisions are reviewed and revised at each reporting date. Common methods include applying a percentage to categories of inventory, conducting item-by-item assessments, or using aging analyses to identify slow-moving items.

Example: A company with 1,000,000 of inventory identifies 50,000 at risk of obsolescence. The entry might be Dr Obsolescence expense 50,000; Cr Allowance for obsolescence 50,000. If the write-down is recorded directly to inventory, the entry could be Dr Cost of goods sold 50,000; Cr Inventory 50,000.

Regulatory context: IFRS requires measurement at the net realizable value, with reversals possible under some circumstances. US GAAP generally uses the lower of cost and net realizable value, with differences in reversal treatment. Tax effects vary by jurisdiction and timing of the write-down.