What is obsolete stock? Obsolescence, provisions and how to manage it

Obsolete stock, in plain English

Dead stock that has stopped selling might still sell one day at a discount. Obsolete stock has crossed a harder line: the market has moved on. The new model shipped, the standard changed, the customer's machines were retired, the use-by date passed. It's the end state of every slow-moving line that nobody acted on.

How obsolescence hits the accounts

• Stock is an asset — until it isn't. Accounting rules require stock to be valued at the lower of cost and what it can actually be sold for. When that falls below cost, the difference must be written down.
• The obsolescence provision. Most businesses hold a provision — a running estimate of how much of the stock value won't be recovered. Auditors ask how it was calculated; "same percentage as last year" is not a method.
• The profit hit arrives in one lump. Stock quietly obsolescing for three years becomes one ugly write-off in the year someone finally counts it — which is why FDs care about catching it early.

Managing it: the practical sequence

• Detect early: review coverage (months of stock vs demand) regularly. Anything showing "years" of cover is obsolescence in progress.
• Act by recovery value: discount → bundle with sellers → return-to-supplier → clearance trade → write off (often with tax relief) as the last resort. Every month of delay moves stock down that ladder.
• Prevent at the purchase order: most obsolete stock was over-bought, not under-sold — an MOQ stretch or a bulk discount that never paid back. Forecast-driven, MOQ-aware buying stops it at the source.