(French Administrative Supreme Court, 8 Jul, 2015, no. 367767, Sté Autodis)

At the end of fiscal years 2000, 2001 and 2002, a company member of a consolidated tax group made an allowance for impairment of inventory based on the initial value of the stock added to balance sheet for less than 24 months and not subject to seasonal promotions. The allowance represented a 10% discount on the value of inventory elements with a turnover rate between 25 and 36 months and a 15% to 20% discount of the value of inventory elements with a turnover rate exceeding 36 months.

Following an audit on this fiscal year, the French Tax Administration added-back the amount of these allowances in the taxable income of the company and consequently neutralised the reversal of allowances for the audited fiscal years.

As the adjustment in the taxable income of the company led to a decrease of loss carry-back of the consolidated group, the parent company requested to the Administrative Court of Orléans to restore the tax loss carry-back.

The Administrative Court of Orléans, followed by the Administrative Court of Appeal of Nantes, rejected the parent company request and held that the company did not justify with enough evidence that its inventory had, at the closing date of each fiscal year audited, a net value lower than the cost price, considering the fact that the inventory elements were neither exposed to a quick obsolescence or a physical damaging, neither to an change in administrative provisions.

Pursuant to its case law, the French Administrative Supreme Court first pointed out that although an allowance for impairment "may be valued with statistical method provided its valuation being performed precisely and based on sufficient details depending on the categories of inventory elements. The Administrative Supreme Court then upheld the reasoning laid out by the lower courts, ruling that the valuation method used by the company did not justify a sufficient level of estimation as it did not take into account:

  • the specific characteristics of each of the various categories of the inventory elements;  
  • the unequal degree of obsolescence of each elements with the same length of time spent in inventory. Hence, the impairment of goods that are subject to technological obsolescence can legally be justified with a statistical calculation based on the application of separate allowances for each homogeneous category of goods.

For example, regarding this issue, the French Administrative Supreme Court has held that the impairment of goods is legally justified for a company manufacturing tooling and instruments representing more than 7,000 different products which make a distinction between three broad categories: finished, semi-finished and new products (French Administrative Supreme Court, 25 Sept, 1989, no. 62934).