Inventory Write-Downs: Method and Tax Treatment in France

Quick answer. An inventory write-down is recorded in account 39 for the difference between cost price and the market price at the inventory date (French Tax Code, Annex III, art. 38 decies). It is deductible only if it is justified, booked at year-end and reported on form 2056 of the tax return.

Inventory sits on your balance sheet at its entry cost. Yet part of that stock often loses value before it is sold: out-of-season items, slow-moving references, damaged goods, end-of-collection products. As long as this loss of value is not recognised, your balance sheet overstates an asset and your result is artificially inflated.

Writing down inventory corrects this gap. In accounting terms, it reflects the prudence principle of the French chart of accounts: an asset must be brought back to its real value as soon as that value falls below its book value. For tax purposes, a properly justified write-down reduces your taxable base for the year, and therefore your tax.

The stakes are not marginal for businesses carrying stock. For a company subject to corporate income tax, every euro of deductible write-down saves tax at the applicable rate: 15% on profit up to 42,500 euros, then 25% above. But the provision must survive an audit, and this is where many files fall short.

An inventory write-down is an asset impairment: it records the loss of value of goods you hold (merchandise, raw materials, work in progress). It differs from provisions for liabilities and charges, which cover a probable future debt or expense (litigation, warranty, restructuring). On that point we refer you to our analysis of provisions for risks and charges on the liabilities side, whose mechanics and legal basis are different.

An inventory write-down is also distinct from the inventory variation mechanism at year-end, which simply adjusts the income statement between opening and closing stock. Variation records a quantity; the write-down records a loss of value on the stock present at the closing date.

The French chart of accounts frames this measurement in its article 214-22: inventory is valued unit by unit or category by category, and both price and sales prospects are considered when assessing a possible write-down. If the current inventory value falls below entry cost, a write-down is required.

The dedicated account is account 39, named "Write-downs of inventory and work in progress" in the French chart of accounts (regulation ANC 2014-03). It is split according to the type of stock concerned.

The charge is recorded by debiting account 6817 ("Charges for impairment of current assets") against a credit to the relevant account 39. At the next closing, if the write-down decreases or disappears, a reversal is booked to the credit of account 7817, which is taxable income.

A practical point often overlooked: the write-down does not change the stock account itself (account 31, 35 or 37). Stock remains booked at entry cost, and account 39 is shown as a deduction on the balance sheet, at net value. This presentation keeps both the gross value and the recognised loss visible at all times.

Writing down inventory should not be improvised. Here is the approach we apply in retail and industrial files at each year-end.

1. Run the physical inventory and identify the references concerned: unsold items, end-of-series, damaged goods, approaching expiry, references with no movement for several months.
2. Determine the entry cost of each line or category, in line with the cost price defined in article 38 nonies of Annex III to the French Tax Code.
3. Estimate the current value, that is the market price or probable selling price net of selling costs, at the inventory date (art. 38 decies of Annex III).
4. Calculate the write-down line by line or category by category: difference between entry cost and current value where the latter is lower.
5. Document the justification: actual markdowns, destruction quotes, lack of outlet, market decline, ageing in stock. This documentation is what makes the provision deductible.
6. Book the charge to 6817 against 39, then report the provision on the provisions schedule of the tax return (form 2056).

The logic is always the same: you do not write down stock because it sits idle, but because facts make a loss-making sale or a non-sale probable. Justification comes before the figure.

Yes, under conditions. An inventory write-down falls within deductible provisions under article 39-1 5° of the French Tax Code. Three substantive and formal conditions must be met.

The deductible base is capped: it equals the difference between cost price (art. 38 nonies) and the market price at the inventory date (art. 38 decies). A write-down above this gap would be partly added back. Conversely, a mere anticipation of lost margin, with no real fall in inventory value, is not deductible.

Securing the tax deductibility of a write-down therefore requires consistency between the accounting entry, the documentation and the tax return. That is precisely the work we carry out when reviewing and preparing the company's taxable result.

The doctrine is clear: a provision calculated by a simple flat percentage applied across the whole stock is not allowed. The official BOFiP doctrine (BOI-BIC-PDSTK-20-20-10-20) rejects arbitrary deductions with no link to the actual probability of loss.

By contrast, the authorities accept differentiated statistical methods: distinct rates by product category based on ageing in stock, deductions aligned with similar lots correctly valued, provided they offer a sufficient approximation. The nuance is decisive. A single 30% rate on all stock will be challenged; a grid such as "0% before 12 months, 25% from 12 to 24 months, 50% beyond" built on the real history of slow sales will be defensible.

The authorities also check consistency between successive balance sheets. A write-down that suddenly appears at one closing, then disappears without a reversal, draws attention. Traceability of reversals matters as much as that of charges.

Micro-BIC regime. The micro regime works through a flat allowance on turnover: there is no balance sheet and no provision, hence no inventory write-down. The question only arises under the actual-profit regime.

E-commerce and marketplaces. E-commerce stock often combines many low-rotation references with a fast obsolescence risk. An ageing-based write-down grid, fed by your management software data, is particularly well suited and defensible here.

Perishable stock (food, cosmetics, pharmacy). The expiry date provides an objective, dated justification. The write-down is set against lots whose date is approaching, which greatly eases the burden of proof.

Goods intended for destruction. When stock is unsellable and destined for destruction, a full write-down is allowed, but it is best supported by a destruction report or a collection slip. Actual destruction secures the definitive removal of the asset.

• Global flat provision: this is the number one reassessment ground on inventory. Work by category or by ageing.
• Missing reversal: forgetting to reverse a write-down that no longer applies distorts the result and weakens the whole position.
• Lack of documentation: without supporting evidence as at the closing date, the write-down is indefensible, even if the stock is genuinely impaired.
• Confusion with a definitive loss: stock destroyed or thrown away is not a write-down but a stock disposal (scrapping), with a separate accounting treatment.

Our reading#

The inventory write-down is one of the few accounting levers that are at once prudent, legitimate and tax-efficient, provided it is treated as analytical work rather than a year-end adjustment. In the files we handle, the added value lies not in the rate chosen but in the quality of the justification attached to each category.

The underestimated risk#

Recently, a manager of an equipment trading business approached us after a proposed reassessment covering three years. He wrote down his stock by 20% "out of prudence" every year, with no grid and no detailed inventory. The authorities added back almost the entire provision: not because the stock was not impaired, but because the method was flat and undocumented. We rebuilt an ageing-based grid from the slow-sales history, which would have secured most of the deduction had it existed from the outset.

This is the underestimated risk: it is not the existence of the write-down that is challenged, but its method. Genuinely impaired stock can be reassessed for lack of justification.

Trade-off#

Should you write down each reference finely or reason by category? For concentrated, high-unit-value stock, line-by-line analysis is appropriate and easily defended. For very fragmented stock (e-commerce, distribution), a grid by category and ageing is more workable and remains accepted if based on real data. Our recommendation: match the granularity of the method to the materiality of the stock, and set it out in a method note attached to the review file.

Because we are registered with the French Institute of Chartered Accountants (Ordre des experts-comptables) and also act as statutory auditors, we approach these provisions with the same standard of proof expected during an audit. That discipline is what holds the deduction together against an inspection.

Hayot Expertise tip. Build an inventory write-down method note once, then apply it consistently every year. Anchor each rate to objective data (ageing, markdown, expiry). Keep the supporting evidence as at the closing date. A documented provision, stable in its logic, is the best protection in case of an audit.