Write-Down

What is a write-down?

A write-down is an accounting adjustment that reduces an asset’s book (carrying) value when its fair market value falls below that carrying value. The write-down amount equals the difference between the asset’s recorded book value and the recoverable amount (the cash the business could obtain by using or disposing of the asset in the most advantageous way). If an asset becomes completely worthless, a write-down becomes a write-off. A write-up is the opposite adjustment (increasing book value).

Key takeaways

• A write-down is required when an asset’s fair market value is below its carrying value.
• The income statement records an impairment loss, which reduces net income.
• The balance sheet shows the asset at its reduced carrying value and shareholders’ equity falls accordingly.
• Tax deductions for impairment generally aren’t allowed until the asset is sold or disposed of.
• If an asset is classified as “held for sale,” the write-down must reflect fair value less costs to sell.

When and why write-downs occur

Write-downs commonly arise when assets are impaired or obsolete. Typical triggers include:
* Declining market prices for assets (e.g., property values or commodity inventories).
* Physical damage or technological obsolescence (common in electronics and auto inventory).
* Poor performance of acquired businesses (goodwill impairment).
* Changes in expected cash flows from long-lived assets.

Example: In 2012, Hewlett-Packard recorded a large impairment charge related to an overvalued acquisition, illustrating how acquisitions or goodwill can be written down when expectations change.

Accounts most likely to be written down

• Goodwill and other intangible assets
• Accounts receivable (when collectability is doubtful)
• Inventory (damaged, obsolete, or slow-moving stock)
• Long-lived assets — property, plant, and equipment (PP&E) — when impaired

Effect on financial statements and ratios

Income statement:
* The write-down appears as an impairment loss (or as part of cost of goods sold for inventory-related write-downs), reducing net income for the period.

Balance sheet:
* The asset’s carrying value is reduced to its fair value (or fair value less costs to sell for assets held for sale).
* Shareholders’ equity decreases because the impairment reduces retained earnings.

Other effects:
* Deferred tax assets or changes to deferred tax liabilities may arise because the write-down is not tax-deductible until disposal.
* Fixed-asset turnover ratios can improve (net sales divided by a smaller fixed-asset base).
* Debt-to-equity and debt-to-assets ratios generally increase due to lower equity and asset bases.
* Future depreciation expense declines because the depreciable base is lower, potentially increasing future reported earnings.

Special considerations

Assets held for sale

When management decides to dispose of an impaired asset, GAAP requires classification as “held for sale” when disposal is likely and imminent. Such assets are measured at the lower of carrying amount or fair value less costs to sell, and are no longer depreciated if classified as held for sale.

Big bath accounting

Companies sometimes take large write-downs during poor-performing periods to “get the bad news out” in one period. This practice—often called a “big bath”—can make future results look stronger by resetting asset bases and lowering future expenses (e.g., depreciation). While legitimate when justified, aggressive timing or magnitude of write-downs can be used to manipulate reported earnings.

Practical implications for managers and investors

• Managers must assess assets regularly for impairment indicators and document the rationale and methodology used to measure recoverable value.
• Investors and lenders should scrutinize impairment charges: a justified write-down signals real economic loss, while repeated large write-downs may indicate poor acquisition decisions or chronic overstatement of asset values.
• Tax effects differ from accounting effects; consultation with tax advisors is typically necessary to determine timing and magnitude of deductible losses.

Conclusion

A write-down adjusts an asset’s book value to reflect diminished recoverability or market value. It reduces reported earnings and equity in the period recorded, affects key financial ratios, and can change future depreciation and profitability patterns. Proper recognition, clear disclosure, and careful analysis of the causes and consequences of write-downs are essential for transparent financial reporting and informed decision-making.