Accounting
Inventory writedowns and impairment
Inventory sits on a balance sheet at cost until the company concludes it cannot recover that cost. At that point the value is written down, the difference goes through the income statement, and the balance sheet stops telling you anything about what happened.
By The Retail Ledger · September 27, 2026
The rule in plain terms
Inventory is carried at the lower of cost or net realizable value: what it cost to acquire, or what it can realistically be sold for less the cost of selling it, whichever is less. When the second figure falls below the first, the difference is recognized as a loss in the period the conclusion is reached, not in the period the goods eventually sell.
That timing matters. A retailer that decides in the fourth quarter that a large block of merchandise will only clear at a fraction of cost takes the hit in that quarter, even if the units physically move over the following year.
What triggers one
Aging is the usual trigger, because seasonal apparel loses realizable value on a schedule. Others include a decision to exit a category, a channel change that removes the outlet the goods were planned for, and a bulk disposal at a price that establishes what the merchandise is actually worth.
Companies describe these events in their filings in fairly consistent language. Gap, for example, told investors it had been required to take impairment charges on unproductive inventory in 2022, and repeated the reference two years later; the wording is in the risk factor comparison.
Why the balance sheet hides the cost
Two retailers can report identical inventory reductions and have done completely different things: one sold through at a modest markdown, the other moved bulk lots at a fraction of cost and wrote down the rest. The inventory line looks the same. The gross margin line does not.
That is why an inventory series should always be read next to the margin series for the same periods, as in what clearing the 2022 glut cost Gap.
Questions
What is net realizable value?
The estimated selling price in the ordinary course of business, less the estimated costs of completion and of making the sale.
Is a writedown the same as a write-off?
No. A writedown reduces the carrying value to a lower recoverable amount. A write-off removes it entirely, typically when the goods are destroyed, donated or worthless.
Can a writedown be reversed?
Under US GAAP a writedown of inventory creates a new cost basis and is not reversed. Other frameworks, including IFRS, permit reversal in limited circumstances.
Where does it show up?
In cost of goods sold, which is why a bad inventory year appears as a fall in gross margin rather than as a separate line most readers notice.
General explanation of accounting concepts, not accounting advice.