What Is a Write-Down?

A write-down is an accounting term for the reduction in the book value of an asset when its 澳洲幸运5官方开奖结果体彩网:fair market value (FMV) has fallen below the carrying book value, and thus becomes an 澳洲幸运5官方开奖结果体彩网:impaired asset. The amount to be written down is the difference between the book v♓alue of the asset and the amount of cash that the business can obtain by disposing of it in the most optimal manner.

A write-down is the opposite of a write-up, and it will become a 澳洲幸运5官方开奖结果体彩网:write-off if the entire value of the asset be⛎comes worthl😼ess and is eliminated from the account altogether.

Understanding Write-Downs

Write-downs can have a huge impact on a company’s 澳洲幸运5官方开奖结果体彩网:net income and 澳洲幸运5官方开奖结果体彩网:balance sheet. During the 2007–2008 澳洲幸运5官方开奖结果体彩网:financial crisis, the drop in the market value of assets on the balance sheets of financial institutions forced them to raise capital to meet minimum capital obligations.

Accounts that are most likely to be written down are a company’s goodwill, 澳洲幸运5官方开奖结果体彩网:accounts receivable, 澳洲幸运5官方开奖结果体彩网:inventory, and long-term assets like 澳洲幸运5官方开奖结果体彩网:🍌property, plant, and eq💛uipment (PP&E). PP&E may become impaired because it has become obsolete or damaged beyond repair, or if property prices have fallen below the 澳洲幸运5官方开奖结果体彩网:historical cost. In the service sector, a business may write down the value of its stores if they noౠ longer serve their purpose and need to b𒈔e revamped.

Write-downs are common in businesses that produce or sell goods, which require a stock of inventory that can become damaged or obsolete. For example, technology and automobile inventories can lose value rapidly, if they go unsold or new updated models replace them. In some cases, a full 澳洲幸运5官方开奖结果体彩网:inventory write-off may be necessary.

澳洲幸运5官方开奖结果体彩网:Generally accᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚepted🧸 accounting principles (GAAP) in𝓀 the United Statesꦕ have specific standards regarding the fair value measurement of intangible assets. GAAP requires that goodwill be written down immediately anytime if its value declines.

For example, in November 2012, Hewlett-Packard announced a massive $8.8 billion impairment charge to write down a botched acquisition of U.K.-based Autonomy Corp. PLC—which represented a huge loss in 澳洲幸运5官方开奖结果体彩网:shareholder value since the company was worth only a fraction of its earlier estimated value.

Effꦯect of Write-Downs on Financial Statements and Ratio🌱s

A write-down impacts both the 澳洲幸运5官方开奖结果体彩网:income statement and the 澳洲幸运5官方开奖结果体彩网:balance sheet. A loss is reported on the income statement. If the write-down is related to inventory, it may be recorded as a 澳洲幸运5官方开奖结果体彩网:cost of goods sold (COGS). Otherwise, it is listed as a s🦋eparate impairment loss line item on the income statement so that lenders and investors can assess the impact of devalued assets.

The asset’s carrying value on the balance sheet is written down to fair value. 澳洲幸运5官方开奖结果体彩网:Shareholders’ equity on the balance sheet is reduced as a result of the impairment loss on the income statement. An impairment may also create a 澳洲幸运5官方开奖结果体彩网:deferred tax asset or reduce a deferred tax liability🔯 because the write-down is not tax d෴eductible until the affected assets are physically sold or disposed of.

In terms of financial statement ratios, a write-down to a fixed asset will cause the current and future 澳洲幸运5官方开奖结果体彩网:fixed-asset turnover to improve, as net sales will now be divided by a smaller fixed-asset base. Because shareholders’ equity falls, 澳洲幸运5官方开奖结果体彩网:debt-to-equity rises. 澳洲幸运5官方开奖结果体彩网:Debt-to-assets will be higher as well, with the lower asset base. Future net income potential rises because the lower asset value reduces future 澳洲幸运5官方开奖结果体彩网:depreciation expenses.

Special Considerations

Assets Held for Sale

Assets are said to be impaired when their net 澳洲幸运5官方开奖结果体彩网:carrying value is greater than the future undiscounted cash flow that these assets can provide or be sold for. Under GAAP, impaired assets must be recognized once it is evident that this book value cannot be recovered. Once impaired, the asset can be written down if it remains in use, or classified as an asset “held for sale” that will be disposed of or abandoned.

The disposition decision differs from a typical 澳洲幸运5官方开奖结果体彩网:write-down because once a company classifies impaired assets as “held for sale” or abandoned, ꦏthey are no longer expected to contribute to ongoing operations. The book value would need to be written down to the fair market value less any costs to sell the item.

Big Bath Accounting

Companies often write down assets in quarters or years when earnings are already disappointing, to get all the bad news out at once—which is known as “taking a bath.” A big bath is a way of manipulating a company’s income stateꦍment to make poor results look even worse, to ma🧔ke future results look better.

For example, banks often write down or write off loans when the economy goes into recession and they face rising 澳洲幸运5官方开奖结果体彩网:delinquency and default rates on loans. By writing off the loans in advance of any losses—and creating a loan loss reserve—they can report enhanced earnings if the 澳洲幸运5官方开奖结果体彩网:loan loss provisions turn out to be overly pessimistic when the economy recovers.

The Bottom Line

In accounting, a♕ write-down is a term for an asset’s reduction in book value when its fair market value (FMV) h𒅌as fallen below the carrying book value, and thus becomes an impaired asset. The amount of the write-down is the difference between the book value of the asset and the amount of cash that the business can obtain by disposing of it in the most optimal manner.