- Inventory is carried at the lower of cost and net realisable value, so ageing stock steadily erodes reported profit.
- Destroying or writing off goods can trigger GST input-tax-credit reversal, while selling them through GST-invoiced channels recovers value.
- An always-on liquidation programme turns provisions into cash, strengthens the borrowing base and gives auditors a clean trail.
Net realisable value: the rule that drives write-downs
Under Ind AS 2 (and the equivalent international standard, IAS 2), inventories are measured at the lower of cost and net realisable value (NRV). NRV is the estimated selling price in the ordinary course of business, less the estimated costs of completion and sale. When stock ages, becomes obsolete or approaches expiry, its NRV falls below cost, and the difference is written down through the profit and loss.
Two implications matter for CFOs:
- Waiting is expensive. Each quarter of delay usually lowers NRV further, so the write-down grows and the eventual cash recovery shrinks.
- Evidence matters. Auditors expect NRV estimates to be supported. Real market prices from an organised buyer network are stronger evidence than internal guesses.
Provision is not recovery
A provision for obsolete stock makes the balance sheet more accurate. It does not bring back a rupee of cash. The goal is to convert as much of the provisioned value as possible into actual receipts, quickly and with a clean audit trail.
The GST angle: avoid ITC leakage
Under the GST law, input tax credit is generally blocked, and must be reversed if already claimed, on goods that are lost, stolen, destroyed or written off. Physically destroying expired or obsolete stock can therefore add a tax cost on top of the write-down. Selling surplus through a GST-invoiced channel keeps the transaction within the normal tax chain. Confirm the treatment for your specific facts with your tax advisor.
Borrowing base and working capital
Lenders typically compute drawing power on eligible, saleable inventory and often exclude aged or obsolete stock. Converting that stock to cash improves liquidity directly, and a cleaner inventory profile can support a healthier borrowing base.
Building the business case
Take an illustrative company with ₹1,000 crore of inventory:
- If 10% is aged, expired or dead, that is ₹100 crore locked up.
- At a 35% recovery on book value (an illustrative range of 25–45%), about ₹35 crore of cash is freed.
- At a 20% annual holding cost, about ₹20 crore a year of carrying cost stops.
Your own numbers will differ. Model them with the interactive business-case calculator, or ask for a free Inventory Health Check that uses your ERP data.
Governance checklist for a liquidation programme
- Approved policy for ageing, expiry and value thresholds that trigger liquidation
- Delegated approval limits, with auto-accept only inside them
- KYC-verified buyers and confidentiality to protect channel pricing
- GST-compliant invoicing and automatic posting back to the ERP
- An audit trail for every lot: listing, offers, approvals, invoice, payment and dispatch
- Quarterly review of recovery rates against targets with the CFO office
Why it pays across the business
Procurement gets feedback on what was over-bought. Supply chain frees space and handling effort. Brand and legal keep pricing protected. Finance gets cash and clean books. Read how the operating flow works in From ERP to cash, and explore Xcess2Sell Liquidation-as-a-Service.
This article is general information, not accounting or tax advice. Consult your auditors and tax advisors for your specific situation.
Frequently asked questions
What is net realisable value (NRV) for inventory?
Net realisable value is the estimated selling price of inventory in the ordinary course of business, less the estimated costs of completion and the costs needed to make the sale. Inventory is carried at the lower of cost and NRV.
Does destroying inventory affect GST input tax credit?
Generally yes. Under GST law, input tax credit is not available, and must be reversed if claimed, on goods lost, stolen, destroyed or written off. Confirm the treatment for your facts with a tax advisor.
How much cash can liquidation recover from dead stock?
It varies by category, age and condition. An illustrative model assumes 25–45% recovery on book value, with 35% as a base case. A health check on your actual data gives a firmer estimate.
See how NovaVente can help with this in practice.
