Write-Down

What Is a Write-Down?

A write-down is an accounting term for the reduction in the book value of an asset when its fair market value (FMV) has fallen below the carrying book value, and in this way turns into a impaired asset. The amount to be written down is the difference between the book value of the asset and the amount of cash that the business can get by discarding it in the most optimal way.

A write-down is something contrary to a write-up, and it will end up being a write-off if the whole value of the asset becomes worthless and is dispensed with from the account altogether.

Understanding Write-Downs

Write-downs can enormously affect a company's net income and balance sheet. During the 2007-2008 financial crisis, the drop in the market value of assets on the balance sheets of financial institutions forced them to raise capital to meet least capital obligations.

Accounts that are probably going to be written down are a company's goodwill, accounts receivable, inventory, and long-term assets like property, plant, and equipment (PP&E). PP&E might become impaired since it has become obsolete, harmed hopeless, or property prices have fallen below the historical cost. In the service sector, a business might write down the value of its stores in the event that they never again fill their need and should be patched up.

Write-downs are common in businesses that produce or sell goods, which require a stock of inventory that can become harmed or obsolete. For instance, technology and automobile inventories can lose value quickly, assuming they go unsold or new updated models supplant them. At times, a full inventory write-off might be important.

Generally accepted accounting principles (GAAP) in the U.S. has specific standards in regards to the fair value measurement of elusive assets. It expects that goodwill be written down quickly whenever assuming its value declines. For instance, in November 2012, Hewlett-Packard announced a gigantic $8.8 billion impairment charge to write down a messed up acquisition of U.K.- based Autonomy Corporation PLC — which addressed a tremendous loss in shareholder value since the company was worth just a small part of its previous estimated value.

Effect of Write-Downs on Financial Statements and Ratios

A write-down impacts both the income statement and the balance sheet. A loss is reported on the income statement. If the write-down is connected with inventory, it could be recorded as a cost of goods sold (COGS). In any case, it is listed as a separate impairment loss detail on the income statement so lenders and investors can survey the impact of devalued assets.

The asset's carrying value on the balance sheet is written down to fair value. Shareholders' equity on the balance sheet is reduced because of the impairment loss on the income statement. An impairment may likewise make a deferred tax asset or reduce a deferred tax liability in light of the fact that the write-down isn't tax deductible until the impacted assets are genuinely sold or arranged.

In terms of financial statement ratios, a write down to a fixed asset will cause the current and future fixed-asset turnover to improve, as net sales will presently be separated by a more modest fixed asset base. Since shareholders' equity falls, debt-to-equity rises. Debt-to-assets will be higher also, with the lower asset base. Future net income potential ascents on the grounds that the lower asset value reduces future depreciation expenses.

Special Considerations

Assets Held available to be purchased

Assets are supposed to be impaired when their net carrying value is greater than the future un-limited cash flow that these assets can give or be sold to. Under GAAP, impaired assets must be recognized once it is apparent this book value can't be recuperated. When impaired, the asset can be written down on the off chance that it stays being used, or classified as an asset "held available to be purchased" which will be discarded or abandoned.

The disposition decision contrasts from a run of the mill write-down in light of the fact that once a company groups impaired assets as "held available to be purchased" or abandonment, they are not generally expected to add to progressing operations. The book value would should be written down to the fair market value less any costs to sell the thing. For more on impairment recognition and measurement, read How do businesses determine in the event that an asset might be impaired?

Big Bath Accounting

Organizations frequently write down assets in quarters or years in which earnings are as of now frustrating, to get all the terrible news out without a moment's delay - which is known as "cleaning up." A big bath is an approach to controlling a company's income statement to exacerbate poor outcomes, to cause future outcomes to seem generally more appealing.

For instance, banks frequently write down or write off loans when the economy goes into recession and they face rising delinquency and default rates on loans. By discounting the loans in advance of any losses — and making a loan loss save — they can report enhanced earnings if the loan loss provisions end up being excessively negative when the economy recuperates.

Features

• Assuming an asset is being "held available to be purchased," the write down will likewise have to incorporate the expected costs of the sale.
• A write down is important on the off chance that the fair market value (FMV) of an asset is not exactly the carrying value currently on the books.
• The income statement will incorporate an impairment loss, lessening net income.
• An impairment can not be deducted on taxes until the asset is sold or arranged.
• On the balance sheet, the value of the asset is reduced by the difference between the book value and the amount of cash the business could get by discarding it in the most optimal way.