Key takeaways
- An inventory ageing report shows how long stock has been held; it is the starting point for both working-capital action and valuation.
- Under IAS 2, inventory is measured at the lower of cost and net realisable value — an ageing-based provision matrix is a practical first estimate, not the final answer.
- Most of the provision usually sits in a small share of very old stock, so clearing it releases cash and protects profit.
- Prevent the build-up at source: better demand planning, purchase controls, and clear ownership of excess and leftover stock.
Inventory is cash in a different form. Every roll of fabric, carton of components or finished product sitting in a warehouse was paid for — or will be — and earns nothing until it is used or sold. When stock moves quickly, that is simply the cost of doing business. When it ages, it becomes a working-capital drain, a storage cost, a risk of obsolescence and eventually a write-down that hits profit, often at the worst possible moment.
This guide explains how to build an inventory ageing analysis, how to use it to estimate a provision consistent with IAS 2, which KPIs to track, and the operational actions that stop slow-moving stock from accumulating in the first place.
1. Building an inventory ageing report
An ageing report classifies each item (or batch) by how long it has been in stock. Two definitions are common:
- Age since receipt — the number of days since the batch was received. This is the most accurate, but it requires batch or lot tracking.
- Age since last movement — the number of days since the item was last issued or sold. This is easier to produce from most ERPs and is a good indicator of slow-moving items, but it can understate the age of stock when small quantities are issued occasionally.
In SAP, standard reports for slow-moving items and stock by last movement provide a starting point, and many companies build a custom report on material documents. In smaller ERPs, ageing is often prepared in Excel from the stock ledger. Whatever the source, the total must reconcile to the general ledger inventory balance every month.
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Inventory value and provision by age (illustrative, BDT million)
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| Category | Gross inventory value | Provision |
|---|---|---|
| 0–90 days | 180 | 0 |
| 91–180 days | 60 | 6 |
| 181–365 days | 35 | 10.5 |
| Over 365 days | 25 | 18.8 |
Values and provision rates in this article are illustrative. Actual provision policies must reflect the company’s products, history of sales and disposals, and specific information about each category.
2. Valuation: lower of cost and net realisable value
IAS 2 Inventories requires inventory to be 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 the costs necessary to make the sale. When NRV falls below cost — because items are damaged, obsolete, out of season or selling at lower prices — the inventory must be written down.
The write-down is normally assessed item by item, although similar items may be grouped. In practice, finance teams use two layers:
- Specific write-downs for items where there is clear evidence: damaged stock, cancelled-order leftovers, discontinued products, items that failed quality testing.
- A provision matrix for the remaining stock, applying higher rates to older age bands, based on the company’s actual history of selling or disposing of aged inventory.
3. A worked provision matrix
| Age band | Gross value (BDT m) | Provision rate | Provision (BDT m) | Net value (BDT m) |
|---|---|---|---|---|
| 0–90 days | 180 | 0% | 0.00 | 180.00 |
| 91–180 days | 60 | 10% | 6.00 | 54.00 |
| 181–365 days | 35 | 30% | 10.50 | 24.50 |
| Over 365 days | 25 | 75% | 18.75 | 6.25 |
| Total | 300 | 35.25 | 264.75 |
The matrix produces a provision of BDT 35.25 million, about 11.8% of gross inventory. Two lessons stand out. First, the oldest band — 8% of stock — accounts for more than half of the provision. Second, the rates matter enormously: a provision rate set at 50% instead of 75% on stock over a year old would reduce the provision by more than BDT 6 million. Rates should therefore be supported by evidence (what percentage of cost was actually recovered on aged stock sold or scrapped in the past two to three years), approved, documented and reviewed annually.
Leftover stock from export orders deserves special attention in garment and textile businesses. Excess fabric, trims and cut-panels from completed orders often have little value outside that buyer’s styles, and may be restricted from being sold under the buyer’s brand. They usually justify a specific write-down rather than a generic age-based rate.
4. KPIs that show the trend
Inventory turnover = Cost of sales ÷ Average inventory
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Days inventory outstanding by quarter (illustrative)
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| Period | Days inventory outstanding |
|---|---|
| Q4-25 | 72 |
| Q1-26 | 78 |
| Q2-26 | 86 |
| Q3-26 | 94 |
Track DIO alongside the share of inventory older than 180 days and the provision as a percentage of gross inventory. When all three rise together, as in the illustration, the problem is structural — buying or producing ahead of demand — and needs operational action, not just a larger provision.
5. Why slow-moving stock builds up
| Cause | Example | Preventive control |
|---|---|---|
| Over-purchasing for price or MOQ | Buying a full container to get a discount | Approval for purchases above forecast need; total cost comparison |
| Forecast errors | Seasonal items bought on last year’s peak | Monthly demand review; S&OP meeting |
| Order cancellations and changes | Buyer cancels or changes colour after fabric arrives | Contract terms for cancellation liability; quick claims |
| Excess allowances | Fabric ordered with generous wastage percentages | Allowance standards by product; post-order reconciliation |
| No owner for leftovers | Leftover stock sits for years | Monthly excess-stock review with disposal deadlines |
| Poor visibility | Stock exists but is not visible to planners | Clean master data, location control, cycle counts |
6. Turning ageing stock back into cash
- Use before buy: require planners to check existing stock before raising new purchase requisitions.
- Re-engineer: use leftover materials in new styles or products where quality and buyer rules permit.
- Return or exchange with suppliers, especially for standard items.
- Sell through secondary channels — stock-lot buyers, outlet sales or local markets — within brand and buyer restrictions.
- Scrap and recover tax where items have no realistic value, following the applicable regulatory and customs procedures for bonded materials.
- Report progress monthly: value cleared, cash recovered and recovery percentage, so the provision rates can be calibrated against reality.
7. Governance and audit readiness
Auditors focus on inventory valuation because it involves judgement. Be ready with: a reconciled ageing report; the documented provision policy and the evidence behind each rate; a list of specific write-downs with reasons; physical count results and adjustments; and NRV testing on a sample of items, comparing cost with recent selling prices less costs to sell. A well-documented process makes year-end smoother and, more importantly, gives management confidence in the numbers they use to plan. The same discipline appears in my month-end close checklist.
Standards referenced in this article
IAS and IFRS are one body of standards — IFRS Accounting Standards, issued by the IASB. Standards issued before 2001 keep their IAS numbers and remain fully in force unless replaced. See the full IFRS & IAS standards list for every number and replacement.
| Standard | Title | Status | IFRS # & IAS # link |
|---|---|---|---|
| IAS 2 | Inventories | In force | No IFRS number — IAS 2 is the IFRS standard |
Frequently asked questions
What is net realisable value (NRV) for inventory?
Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the costs necessary to make the sale. Under IAS 2, inventory is carried at the lower of cost and NRV.
Is an ageing-based provision matrix acceptable?
It is a widely used practical method, provided the rates are supported by the company's actual history of selling or disposing of aged stock and are supplemented by specific write-downs for items with clear evidence of impairment.
What is the difference between DIO and inventory turnover?
They measure the same thing from different angles. Inventory turnover shows how many times inventory is used or sold in a period; DIO converts this into the average number of days inventory is held. Higher turnover means lower DIO.
Conclusion
Inventory ageing is both a valuation tool and a management tool. Produce a reconciled ageing report every month, value stock at the lower of cost and NRV with a documented, evidence-based provision approach, track DIO and the share of old stock, and give someone clear ownership of clearing excess inventory. The result is a cleaner balance sheet, fewer year-end surprises and more cash available for the business.
Written by Liakat Hossain
Finance and accounts professional with experience in FP&A, SAP FICO, Power BI, internal control, reporting, audit, tax, VAT and export-oriented business operations.
This article is original educational content based on professional finance practice. Real-project examples are anonymized, and scenario figures are identified as model outputs rather than guaranteed results.