Book Value Reduction

What is Book Value Reduction?

A book value reduction brings down the value at which an asset is carried on the books. This reduction happens on the grounds that changes in the asset or market conditions have diminished its current market value.

Understanding Book Value Reduction

Book value reduction is a non-cash charge recorded in the general ledger. It incorporates a reduction to the value of an asset on the balance sheet, as well as an offsetting expense. Thusly, it additionally lessens net income on the income statement in a similar accounting period in which the book value reduction is distinguished and booked. Under certain conditions, the book value reduction and related expense can be a robust figure that might bring about critical losses for the reporting entity.

Since it is viewed as a unusual item, companies as a rule report generally accepted accounting principles (GAAP) net income (or loss), considering the book value reduction charge, as well as a "pro forma" or non-GAAP earnings that prohibits the charge. A book value reduction is all the more generally called an asset write-down or impairment in the well known press.

Requirements for Book Value Reduction

While GAAP requires a reduction in book value of an asset on the off chance that there has been critical impairment, testing all assets for such impairment on a month to month or quarterly basis would be unimaginable. In this way, GAAP determines rules about when such impairment tests ought to be made. In particular, property, plant, and equipment and limited life intangible assets — which are depreciated or amortized over the long haul — ought to be tried for impairment when market or asset changes recommend the book value of the asset might be exaggerated and not completely recoverable.

A test for conceivable book value reduction might be indicated in a number of circumstances. These remember a substantial lessening for market price, an adverse change in the physical condition of the asset, economic conditions, a negative political change in the country where the asset is found, and so on.

Under GAAP, theoretical enduring assets that are not subject to amortization, as goodwill, ought to be assessed for impairment to some degree annually.

GAAP versus IFRS Differences

The accounting rules with respect to the reversal of book value reductions vary among GAAP and International Financial Reporting Standards (IFRS). For instance, U.S. GAAP prohibits the reversal of previous inventory write-downs, yet IFRS permits them in specific situations. Then again, both GAAP and IFRS prohibit reversals of goodwill write-downs.

Illustration of Book Value Reduction

A book value reduction is recorded in a journal entry as a decline in value to an asset account, a credit, and an increase to an expense account, a debit. For instance, expect ABC Company, a video web-based feature, acquired XYZ Corp, a brick-and-mortar film store chain, a long time back. ABC recorded $10 million of goodwill at the hour of acquisition. Consistently, under GAAP, it is required to reconsider the value of its reported goodwill to decide whether it is as yet accurate or on the other hand if a goodwill impairment has been incurred.

ABC Company is playing out their annual goodwill test and discovers that the demand for physical video rentals and purchases is down essentially from the time they acquired XYZ Corp. They likewise decide the probability of a rebound in this market is far-fetched from here on out. Since goodwill is impaired, a book value reduction is all together. ABC's accountants will record a journal entry to credit the goodwill asset account and debit a goodwill impairment expense account. The expense will bring down ABC's reported net income on its next reported income statement.

Special Considerations

Financial analysts keep a close eye out for changes in book value gauges. At the point when a company writes down asset levels startlingly and with minimal economic support, it can signal difficulty. Public companies will take great measures to make sense of changes through their corporate communications and investor relations groups.

Features

• Many companies will publicly introduce both GAAP earnings, with the book value reduction charge, as well as non-GAAP earnings, excluding the charge.
• At the point when a company writes down asset levels out of the blue and with minimal economic legitimization, it can signal difficulty.
• Book value reductions to an asset account are joined by a charge to an expense account, which brings down net income on the income statement.
• A book value reduction is the consequence of the diminished market value of an asset.