Write-Down (Accounting)

When a company decreases the carrying value of an asset other than via regular depreciation and amortization, it is known as a write-down. It is an accounting term indicating a decrease in an asset’s book value when its fair market value (FMV) falls below its carrying book value, resulting in an impaired asset. The write-down charge is reported in its entirety on the income statement, while the asset’s lower carrying value is reported on the balance sheet.

The add-up to be recorded is the distinction between the book worth of the resource and the measure of money that the business can acquire by discarding it in the most ideal way. Record exchanges are frequently essential when there is an antagonistic financial climate. For instance, monetary organizations should record resources that are presently exaggerated when contrasted with market costs. These compose downs are then moved to the pay proclamation as an exceptional cost.

A write-down is the inverse of a write-up, and it becomes a write-off when the asset’s whole value depreciates to the point of being worthless and being removed from the account entirely. Because there is no cash outflow when a write-down is taken, it is a non-cash expenditure. The company’s present financial position is more appropriately reflected by writing down the value of an asset. However, write-downs are not limited to financial institutions.

Example of Write-Down

On the accounting report, the worth of the resource is diminished by the contrast between the book esteem and the measure of money the business could acquire by discarding it in the most ideal way. Various organizations make compose downs to esteem their resources appropriately. To summarize, the motivation behind such exchanges is to mirror the reasonable worth of the multitude of resources held by an organization.

A write-down should be made as soon as management recognizes that the market value of an asset has decreased; this realization should not be delayed, as is often the case when a business tries to control its profitability. If an asset is being “held for sale,” the write-down must include an account for the anticipated selling expenses. The impact of write-downs on a company’s net income and balance sheet can be significant. During the 2007-2008 monetary emergency, the drop in the market worth of resources on the asset reports of monetary establishments constrained them to raise money to meet the least capital commitments.

There is a tax benefit to writing down since the loss generates a tax-deductible paper expenditure. This indicates that a write-off will lower the company’s tax burden. Goodwill, accounts receivable, inventory, and long-term assets like as property, plant, and equipment are the most likely to be written down (PP&E). PP&E may be degraded because it is no longer in use, is broken beyond repair, or property values have dropped below historical levels.

A write-down is an accounting operation that reduces the value of an asset to its current market value. In the service industry, a company may write down the value of its shops if they are no longer useful and need to be updated. Businesses that make or sell items, which require a store of inventory that might become damaged or obsolete, are prone to write-downs.

A write-down is when the carrying value of an asset is decreased in a company’s accounting records to a lower value. In the United States, generally accepted accounting principles (GAAP) provide particular requirements for determining the fair value of intangible assets. It necessitates that altruism be recorded promptly whenever if its worth decays. In a discount, the whole leftover equilibrium of the resource is diminished to nothing.

Because the write-down is not tax-deductible until the affected assets are physically sold or disposed of, an impairment may result in the creation of a deferred tax asset or the reduction of deferred tax liability. A write-down of a fixed asset will enhance present and future fixed-asset turnover since net sales will now be split by a lower fixed asset base, according to financial statement ratios. Companies sometimes write down assets in quarters or years when profits have already been disappointing, in order to get all of the bad news out at once, a practice known as “taking a bath.”

Information Sources:

  1. myaccountingcourse.com
  2. investopedia.com
  3. accountingtools.com