Write Down

Updated on January 3, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Write Down Meaning

Write down refers to the reduction in the book value of assets when its carrying value (purchase price – accumulated depreciation) exceeds fair value. The impaired asset and its reduced value are reflected in the balance sheet. In addition, the impaired amount is shown as a separate item in the income statement as an impairment charge or an impairment loss.

How does Write Down Work?

Generally, when an asset is purchased, it is shown at an acquisition cost on the balance sheet, and each year, depreciation is subtracted from that value. An asset is tested to know whether the fair value exceeds or is less than the carrying value. This impairment test considers the future identifiableCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read moreCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more cash flowsCash FlowsCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more from that asset. If the carrying value of that asset exceeds undiscounted cash flows from that asset, then the asset is impairedAsset Is ImpairedImpaired Assets are assets on the balance sheet whose carrying value on the books exceeds the market value (recoverable amount), and the loss is recognized on the company's income statement. Asset Impairment is commonly found in Balance Sheet items such as goodwill, long-term assets, inventory, and accounts receivable.read more, and value is written down to fair value.

The amount by which carrying value exceeds fair value is shown as impairment charges in the income statement, affecting the balance sheet through reserves and surplusReserves And SurplusReserves and Surplus is the amount kept aside from the profits that are to be used either for the business or for the shareholders to pay out dividends. Reserves and surplus is reflected under shareholders funds in the balance sheet.read more.

Cash flow is not affected by this treatment until the asset is sold, after which gain or loss is recognized in cash flow from investing activitiesCash Flow From Investing ActivitiesCash flow from investing activities refer to the money acquired or spent on the purchase or disposal of the fixed assets (both tangible and intangible) for the business purpose. For instance, the purchase of land and joint venture investment is cash outflow, while equipment sale is a cash inflow.read more. The impairment charge is added back to the cash flow from operating activities as it’s a non cash expenseNon Cash ExpenseNon-cash expenses are those expenses recorded in the firm's income statement for the period under consideration; such costs are not paid or dealt with in cash by the firm. It involves expenses such as depreciation.read more, nullifying its effect on cash flow.

Write Down

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Write Down (wallstreetmojo.com)

Write Offs in Accounting Explained in Video

 

Types of Asset and their Impairment Test

Various assets, tangible or intangible with definite lives or intangibles with indefinite lives, are tested for impairment when a significant event occurs.

#1 – Tangible Assets

Tangible assetsTangible AssetsTangible assets are assets with significant value and are available in physical form. It means any asset that can be touched and felt could be labeled a tangible one with a long-term valuation.read more that are likely to be impaired include property plant & equipment, inventory, and accounts receivableAccounts ReceivableAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more. PP&E may be impaired due to a fall in value because of the introduction of new machinery/equipment, or it is damaged beyond repair. In the case of inventory, several businesses which deal in perishable goods need to write down their inventory value with time. A technology company like Apple has to write down the value of older models by introducing new ones.

Accounting for Financial Analyst (16+ Hours Video Series)

–>> p.s. – Want to take your financial analysis to the next level? Consider our “Accounting for Financial Analyst” course, featuring in-depth case studies of McDonald’s and Colgate, and over 16 hours of video tutorials. Sharpen your skills and gain valuable insights to make smarter investment decisions.

#2 – Intangible Assets

Intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more lack physical substance like a trademark, copyright, patent, goodwill, etc. Impairment may occur due to a significant decrease in market price or adverse changes in legal and economic factorsEconomic FactorsEconomic factors are external, environmental factors that influence business performance, such as interest rates, inflation, unemployment, and economic growth, among others.read more. The impairment test is done annually for intangible assets with indefinite lives.

#3 – Fixed Asset held for Sale

An asset is reclassified as an asset held for sale when it is no longer to be used, and the company’s goal is to sell it. If a machine ceases to be used and the company intends to sell it, then the machine is reclassified from property plant & equipment to asset held for sale. Assets previously held for use are tested for impairment when reclassification occurs, and if the carrying amount exceeds fair value less cost to sell, an impairment charge is made.

A real-life example of write-downs is the 2008 subprime crisis. At that time, many of the real assetsReal AssetsReal Assets are tangible assets that have an inherent value due to their physical attributes. These assets include metals, commodities, land, and factory, building, and infrastructure assets. read more on the books of the investment banks fell below the carrying value. The fall was such that many assets fell around 80% in value due to the nonpayment of mortgage loans and a fall in demand for assets. As a result, theEquity Value, also known as market capitalization, is the sum-total of the values the shareholders have made available for the business and can be calculated by multiplying the market value per share by the total number of shares outstanding.read more equity valueEquity ValueEquity Value, also known as market capitalization, is the sum-total of the values the shareholders have made available for the business and can be calculated by multiplying the market value per share by the total number of shares outstanding.read more of many investment banks went negative, and some became bankrupt.

Similarly, a write-up is another accounting treatment where a reversal of impairment is made. After an asset is impaired, the asset’s fair value may increase. Like if a property is in dispute, it will sell for less. But if the dispute is resolved, its value would rise and may gain more than impairment loss.

Effect on Financial Statements

Write down, affects both the income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more  and balance sheet. An impairment charge is shown as a separate line item in the income statement. The reduced net profit due to impairment charge from the income statement goes to reserve and surplus under shareholder’s equity, which affects the balance sheet. On the assets side, an asset is reduced by the same amount as the impairment charge, thus making assets equal to liabilities and equity.

The reduced asset value will lead to less depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more, which will lead to a rise in net profit for future periods.

Write down vs. Write offs

Write down recognizes the fall in the value of an asset when the market value falls below book value. In contrast, writing off means completely removing an asset from the books due to no recoverable amountRecoverable AmountThe recoverable amount of an asset is the present value of the expected cash flows that will result from the asset's sale or use, and is determined as the greater of two amounts: the asset's fair value as reduced by related selling costs, and the asset's value in use.read more from that particular asset. If an investment is made in bonds of a company and that company goes bankrupt, the return on investment becomes highly unlikely. Therefore it’s written off from the balance sheet of the company.

Conclusion

Write down enables the investors to see the real value of the assets rather than book value and helps them make informed decisions. But it is also often used as a manipulating tool by the companies to lower their earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments.read more for a tax benefit or future benefits.

Recommended Articles

This article has been a guide to Write Down and its meaning. Here we discuss how to write down works, their types, and their impairment test, along with their effect and differences from write-offs. You can learn more about it from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *