Obsolete and slow-moving inventory is one of the items most likely to distort the interpretation of financial statements when it is not identified, assessed, documented, recorded, and charged to expense on a timely basis. Although the goods may physically remain in storage, their ability to generate future economic benefits may have been significantly reduced by deterioration, expiration, technological changes, loss of demand, product substitution, physical damage, or business decisions. Accordingly, proper inventory management is not merely an operational matter; it is also essential for presenting reliable financial information and supporting the related tax treatment.
Inventories are a significant component of current assets and, in many companies, represent a substantial portion of working capital. If they remain recorded at an amount higher than their recoverable value, the financial statements may present overstated assets, artificially high margins, and profits that do not reflect the economic reality of the business. As a result, users of financial information—including shareholders, management, banks, auditors, and tax authorities—may make decisions based on incomplete or unreliable figures.
Timely recognition of inventory impairment, obsolescence, or low turnover allows the balance sheet to reflect realizable assets and the income statement to recognize the corresponding losses in the appropriate period. This treatment enhances comparability, prevents the accumulation of hidden losses, and improves the reliability of key indicators such as inventory turnover, gross margin, current ratio, and operating profitability.
Obsolete inventory refers to goods that have fully or partially lost their economic utility, either because they can no longer be sold, used in production, or expected to generate future benefits. Slow-moving inventory, by contrast, may still retain potential value but turns over at a slower rate than expected, increasing storage costs, the risk of impairment, and the need for discounts or liquidation strategies. This distinction is important because not all slow-moving inventory should be written off immediately; however, it should be analyzed, documented, and monitored under objective criteria.
An appropriate policy should consider inventory aging, sales history, projected demand, physical condition, expiration dates, net realizable value, liquidation plans, potential returns to suppliers, donation, destruction, or alternative use.
From a Mexican tax perspective, inventory that has lost value due to impairment or other causes not attributable to the taxpayer may give rise to deductible effects, provided that the applicable requirements are met. The Income Tax Law allows for the deduction of goods, raw materials, semi-finished products, or finished products that have lost their value, as long as the deduction is taken in the fiscal year in which the loss occurs and the corresponding regulatory requirements are observed.
Timeliness is essential. Charging inventory to expense or recognizing the loss at a later date may create differences between the accounting records and the company’s actual economic situation, while also weakening the tax support for the deduction. If the company cannot demonstrate when the loss occurred, why the inventory ceased to have value, and what actions were taken to dispose of it, the tax authority may challenge the deduction or presume improper handling of the goods.
For the accounting and tax treatment to be properly supported, the company should maintain a file for each relevant event involving obsolescence, impairment, destruction, donation, or write-off. This file should evidence the existence of the inventory, its cost, its location, the cause of the loss in value, the internal authorization, any destruction authorized by the relevant authorities, and the final destination of the goods. Documentation should not be prepared solely at year-end; it should be generated as events occur and retained in an organized manner.
For accurate and strategic decision‑making, it is recommended to always consult with a qualified professional from ZALDIVAR CONSULTING.
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