Write-Down

A write-down is an accounting adjustment that reduces the carrying amount of an asset on the balance sheet because the asset is now worth less than the amount at which it is recorded. The reduction is normally charged to the income statement as a loss or expense in the period the decline is identified. A write-down differs from a write-off, which removes an asset entirely because it is considered worthless, such as an uncollectible receivable or destroyed stock. A write-down keeps the asset on the books at a lower value.

Write-downs put into practice the rule that assets should not be carried at more than the economic benefits they are expected to produce. They often follow events such as falling market prices, damage, obsolescence, changes in technology, the loss of a major customer or a downturn in a business unit.

• Inventory: under US GAAP and IFRS, most inventory is measured at the lower of cost and net realizable value. If goods can only be sold for less than they cost, after selling costs, they are written down to net realizable value.
• Property, plant and equipment: when events suggest an asset may not be recoverable, it is tested for impairment, and an impairment charge reduces it to fair value under US GAAP, or to recoverable amount under IFRS.
• Goodwill and intangible assets: annual impairment tests may lead to goodwill impairment, often among the largest write-downs companies report.
• Investments: securities not measured at fair value through income may be written down for credit losses or other declines.

An electronics retailer holds 2,000 tablets bought at $250 each, a total cost of $500,000. A new model is released, and the old tablets can now be sold for only $220 each, with selling costs of $10 per unit. Net realizable value is $210 per unit, or $420,000 in total. The write-down is:

Here the carrying amount is $500,000 and net realizable value is $420,000, giving a write-down of $80,000. The entry debits a loss on inventory write-down, or cost of goods sold, and credits inventory, or an allowance to reduce inventory to net realizable value, for $80,000. When the tablets are later sold at $220, the retailer's margin on them is small, because most of the loss has already been recognized.

US GAAP and IFRS differ on whether a write-down can be reversed if values recover:

• Under US GAAP, an inventory write-down establishes a new cost basis that is not written back up in later annual periods, and impairment losses on property, plant and equipment, intangibles and goodwill held for use cannot be reversed.
• Under IFRS, inventory write-downs are reversed, up to the original cost, if net realizable value rises, and impairment losses on assets other than goodwill may be reversed if the recoverable amount increases.

Large write-downs reduce reported profit and equity, but they are non-cash charges: the cash was spent when the asset was acquired. Analysts often exclude them from adjusted earnings, while noting that repeated write-downs suggest poor investment decisions or overly optimistic past valuations. Some companies have been criticized for taking unusually large write-downs in a bad year, a practice sometimes called a big bath, which lowers future depreciation and makes later results look better. For US income tax, most write-downs of fixed assets and goodwill are not deductible until the asset is sold or abandoned, while certain inventory write-downs for damaged or obsolete goods may be deductible, creating differences that are recorded as a deferred tax asset.