Why obsolete inventory weighs on SME balance sheets
Inventory that has not moved for months, components replaced by new versions, out-of-collection items, or materials past their expiry date: obsolete and unsold stock is a common reality for Swiss SMEs, especially in retail, manufacturing, and distribution. If not managed rigorously, it inflates assets, distorts operating margin, and creates risks during audit or tax assessment.
In Switzerland, the accounting principle is clear: inventory must be recorded at acquisition or production cost, but cannot exceed net realisable value (Art. 960c para. 1 CO). When an item can no longer be sold at its original price — or cannot be sold at all — the company must write it down. The write-down reduces accounting profit and is generally tax-deductible for income tax purposes, provided it is justified, documented, and consistent with economic reality.
This guide explains how SMEs can identify at-risk inventory, apply write-down criteria compliant with the Code of Obligations and Swiss accounting standards, prepare the documentation required by auditors and tax authorities, and assess the impact on the balance sheet and VAT.
How to identify obsolete, unsold, or at-risk inventory
Before writing down inventory, it must be classified correctly. Not every slow-moving item is obsolete: the distinction determines the accounting treatment and the degree of prudence required.
Unsold inventory
Goods that are still technically saleable, but with abnormally low turnover compared with industry averages or company history. Examples: excess stock due to forecasting errors, out-of-season products suitable for clearance or outlet sales.
The write-down is partial and based on estimated realisable value (expected selling price minus marketing costs).
Obsolete inventory
Items whose use or resale value is substantially lost: components replaced by new technologies, non-compliant products, expired materials, packaging with outdated branding, spare parts for discontinued models.
The write-down tends toward net realisable value, often zero if disposal is the only option.
Damaged or defective inventory
Goods compromised by insurable or non-insurable events: transport damage, spoilage, production defects, contamination. These require internal or external appraisal and, where applicable, coordination with the insurance company.
The write-down covers the portion that is neither recoverable nor covered by compensation.
At-risk raw materials and finished goods
Work in progress tied to cancelled orders, raw materials whose reference market has collapsed, finished goods for customers that have ceased operations. Here too, the write-down follows the lower of cost and net realisable value.
Monitoring inventory age by category (aging analysis) is the most effective practice for identifying critical cases.
Write-down criteria: comparing methods
The Code of Obligations requires the lower of cost and net realisable value. In Swiss SME practice, the following approaches are applied; they must be applied consistently over time and formalised internally:
| Method | When to use | Calculation basis | Caution |
|---|---|---|---|
| Net realisable value | Unsold inventory with potential for discounted sale | Estimated selling price minus direct disposal or marketing costs | Document the sources of the estimated price (outlet price lists, offers, discount history) |
| Age-based flat-rate write-down | Large homogeneous volumes (fashion, electronics, food) | Increasing percentages based on months in stock (e.g. 0–6 months: 0%, 7–12: 25%, over 24: 100%) | The scheme must be approved by management and applied uniformly; it does not replace analysis of individual extreme cases |
| Full write-down | Obsolete inventory with no market value | Reduce carrying value to zero (or to scrap recovery value) | Requires clear evidence of obsolescence (supplier communications, end of production, expiry dates) |
| Cost vs market price | Raw materials with exchange or public list prices | If the current market price is below historical cost, write down by the difference | Typical for metals, granulates, commodities; verify the reference date of the price |
| Redetermined production cost | Finished goods with non-recoverable production costs | Full production cost minus unrealisable margins | Consistent with Swiss GAAP FER 17; pay attention to fixed costs to be allocated |
Accounting treatment under CO and Swiss GAAP FER
Inventory is classified as current assets and must be valued in the balance sheet at the lower of acquisition (or production) cost and net realisable value (Art. 960c para. 1 CO). Cost includes the purchase price, directly attributable charges and, for finished goods, conversion costs. Net realisable value corresponds to the estimated net selling price at which the item can reasonably be disposed of, net of costs necessary to complete and sell it.
The write-down is recorded by debiting an inventory valuation adjustment account (expense account, typically in class 69 or equivalent in the chart of accounts) and crediting a contra-asset on inventory in the balance sheet. In this way, the net carrying value of stock on the balance sheet reflects recoverable value.
If conditions change — for example, a buyer is found at a higher price — the write-down may be partially reversed, within the limits of original cost and in compliance with the prudence principle. SMEs applying Swiss GAAP FER must also consider any sector-specific guidance (FER 17 for inventory) and ensure that write-downs are not offset against latent gains on other inventory items.
Numerical example
A Ticino-based SME importing electronic components holds 500 units purchased at CHF 40 each (total cost CHF 20,000). The supplier has launched a compatible but non-interchangeable version; the remaining stock has no buyers and scrap value is estimated at CHF 2 per unit (total CHF 1,000).
Write-down to record: CHF 19,000. On the balance sheet, inventory is shown at a net value of CHF 1,000. In the income statement, the write-down cost reduces profit for the year.
Documentation: what to retain for audit and tax purposes
The tax deductibility of a write-down depends largely on the quality of documentation. Cantonal authorities and auditors accept significant write-downs only if supported by verifiable evidence and a traceable decision-making process.
- 1Physical inventory and aging report. Periodic count (at least at year-end) with date, location, people involved, and quantities per item. Aging report showing how long each item has been in stock.
- 2Write-down worksheet per item or homogeneous group. Item code, quantity, unit cost, gross carrying value, criterion applied, amount written down, residual net value, rationale.
- 3External evidence of obsolescence. Supplier communications, end-of-production notices, regulatory updates, certified expiry dates, damage appraisal reports, disposal quotes.
- 4Management resolution. For material write-downs, a written decision by management or the board approving the amount and criterion, with reference to the accounting principle applied.
- 5Proof of disposal or loss-making sale. If stock is destroyed, donated, or sold below cost, retain delivery notes, destruction certificates, sales invoices, and accounting records of the outflow.
Best practice for SMEs using Accountex
Centralise in a single digital dossier per financial year: physical inventory, write-down worksheets, management resolution, and disposal documents. Linking each accounting entry to the internal document number facilitates the auditor's work and reduces the risk of adjustments during tax filing.
Tax impact: income tax and VAT
Income tax (federal and cantonal)
Inventory write-downs are in principle deductible as operating expenses, provided they are attributable to the accounting period and justified by commercial use (Art. 58 para. 1 LIFD and Art. 67 para. 1 LT; analogous cantonal provisions). They reduce the taxable profit of a corporation or, for sole proprietors, taxable income.
Caution: excessive or unfounded write-downs may be added back by the tax authorities. Write-downs systematically reversed the following year without justification may be treated as impermissible temporary adjustments.
Municipal taxes and dividends
Since taxable profit is reduced, the municipal share of cantonal tax (municipal multiplier) also decreases; the rate varies by municipality. For companies that distribute dividends, a significant write-down temporarily compresses the distributable base: an effect to communicate to shareholders or partners when approving the financial statements.
In groups with controlled companies, verify that write-downs are consistent across entities and do not create transfer pricing margins on intercompany inventory.
VAT adjustments on inventory
A balance-sheet write-down alone does not as a rule trigger a VAT adjustment: the goods remain in stock and continue to serve the taxable activity. The obligation to adjust input tax deduction arises instead at the time of actual removal from stock, when the conditions for deduction cease to apply (own use, Art. 31 VAT Act): for example in case of destruction, gratuitous donation without business purpose, proven theft, or cessation of activity.
In practice: if obsolete stock is destroyed or donated free of charge, the company must verify whether an input tax adjustment on the current value of the goods is required (Art. 31 para. 3 VAT Act), taking into account any linear reduction for elapsed years. Donations may also raise cantonal gift tax considerations. For below-cost sales with invoice, VAT remains due on the actual agreed price if the supply is taxable.
Documenting physical removal from stock and VAT treatment separately avoids double adjustments or omissions in periodic returns.
Recommended year-end operational procedure
A structured process reduces errors and speeds up approval of the financial statements. Here is a workflow suited to Swiss SMEs:
| Stage | Activity | Output |
|---|---|---|
| 1. Physical inventory | Count all locations; reconcile with accounting inventory | List of quantity variances and inventory adjustments |
| 2. Aging analysis | Classification by age, turnover, and operational flags (returns, complaints, completed orders) | List of items candidates for write-down |
| 3. Valuation | Application of approved criteria; estimate net realisable value per item or group | Write-down worksheets with amounts and rationale |
| 4. Approval | Review by the finance manager and management; written resolution | Dated internal approval document |
| 5. Accounting entry | Recording of write-downs; update of inventory value in the balance sheet | Journal entries and updated trial balance |
| 6. VAT check and disposal | VAT adjustment if required; physical removal with traceability | Corrected VAT returns and proof of destruction or sale |
Common mistakes and risks to avoid
Writing down without a physical inventory. Relying solely on ERP data without an actual count exposes the company to write-downs on non-existent stock or omissions of items forgotten in secondary warehouses.
Inconsistent criteria across periods. Alternating flat-rate and analytical approaches without justification reduces the credibility of the financial statements and may be challenged by the auditor or tax authorities.
Confusing accounting write-down and physical write-off. Writing down to zero in accounting does not eliminate the obligation to record actual removal from stock and to manage any VAT adjustments at the time of disposal.
Retaining obsolete stock to avoid impact on profit. Artificially inflating inventory violates the prudence principle (Art. 960c para. 1 CO) and poses a significant risk in ordinary or limited audit, as well as in tax assessment.
Ignoring the effect on cash flow. Even though a write-down is a non-cash expense, disposal may involve logistics costs, environmental disposal fees, or aggressive discounts: it should be factored into financial planning for the following year.
Conclusion: turning a hidden liability into proactive management
Obsolete and unsold inventory is not simply a logistics mishap: it is a balance-sheet item that, if ignored, undermines the reliability of assets and clarity of the result for the year. For Swiss SMEs, the combination of rigorous physical inventory, formalised write-down criteria, complete documentation, and attention to VAT adjustments constitutes the minimum standard for a smooth year-end close.
Integrating inventory analysis into a monthly or quarterly cycle — not only at year-end — allows intervention before obsolescence becomes a total loss. Accounting software such as Accountex supports traceability of entries, document linking, and production of reports for auditors and tax advisers, reducing time spent on closing and strengthening business decision-making.