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Definition
In business and finance, a “write down” refers to the accounting practice of reducing the book value of an asset on a company’s balance sheet.
What is a write down?
This adjustment is made when the fair market value of the asset has declined below its carrying amount, or the amount at which it is currently recorded on the books. A write down is a recognition that the asset’s recoverable value has decreased, and it provides a more accurate representation of the asset’s true economic value.
The primary reason for a write down is that the carrying amount of an asset exceeds its recoverable amount. This can happen due to factors such as a decline in market value, technological obsolescence, or changes in economic conditions.
Impairment triggers a write down, and the assessment of impairment is typically conducted for assets like goodwill, intangible assets, long-term investments, or property, plant, and equipment.
The write down is recorded as an expense on the income statement, reducing the company’s net income. At the same time, the value of the impaired asset on the balance sheet is adjusted downward.
Write downs may have tax implications. In some jurisdictions, the decrease in the value of assets can lead to tax deductions, reducing the company’s taxable income.
Companies are required to disclose significant write downs in financial statements to provide transparency to investors and stakeholders.
Example of a write down
ABC Corporation, a technology company, holds inventory of electronic components that have become obsolete due to advancements in technology. As a result, the market value of this inventory has declined significantly below its original cost.
The company’s accounting department assesses the situation and determines that a write-down of the inventory is necessary to accurately reflect its true value on the balance sheet.
By writing down the inventory, ABC Corporation acknowledges the loss in value and ensures its financial statements provide a more accurate representation of the company’s financial position.
