What is a 'Write-Down'
A write-down is the reducing of the book value of an asset because it is overvalued compared to the market value. A write-down typically occurs on a company's financial statement, when the carrying value of the asset can no longer be justified as fair value and the likelihood of receiving the cost, or book value, is questionable at best.
BREAKING DOWN 'Write-Down'Write-downs are typically reflected in a company's income statement as an above-the-line expense, thereby reducing net income. This, however, is not always a bad thing since a write-down is simply a paper loss; it lowers net income, reducing a firm's tax burden. Companies usually attempt to time large write-downs together so they can "take a bath" in one reporting period with the hope of quickly recovering in the next period.
Write-downs are especially common in businesses focused on the production or sale of goods, though impacts to the service industry can also occur. Not only can the value of the finished inventory decline, the value of the components used to create the inventory can also decline. Inventory that becomes incidentally damaged, rendering it useless for its designed purpose, may also be written down, along with any inventory reported as missing or stolen.
Write-Downs in the Retail Industry
The act of writing down is most apparent in the retail space. Certain assets, such as vehicle inventories or technology products, can change in value rapidly. For example, when a car model year rolls over, the cars from the previous year, though still brand new, lose value as the new model year vehicles become available. The same can be seen in technology goods, where the release of an updated version lowers the value of the previous.
Write-Downs and General Assets
The value of company-held assets can also lower with time, often through standard depreciation and issues of wear and tear. Manufacturing equipment and company vehicles generally lose value as they age. While real estate is normally seen to appreciate in value, if structures become significantly damaged or are deemed unusable, they may also be subject to losses.
Write-Downs and the Service-Based Industry
Similar to production, the service-based industry can experience the devaluation of its held assets. Even if the business is not centered on product sales, the value of the items required to perform the service are subject to wear and tear or becoming obsolete as technology changes. This can include items such as the point-of-sale system, display tables, store fixtures and any owned retail spaces. Any physical item that may have to be replaced due to loss of its ability to perform its key function may need to be written down over time.