Loading the player...

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.

RELATED TERMS
  1. Book Value Reduction

    A book value reduction takes place when writing down the value ...
  2. Inventory Accounting

    Inventory account is the body of accounting that deals with valuing ...
  3. Liquidation Value

    The total worth of a company's physical assets when it goes out ...
  4. Inventory Write-Off

    An inventory write-off is an accounting term for the formal recognition ...
  5. Adjusted Book Value

    The adjusted book value is a measure of a company's valuation ...
  6. Book Value Per Common Share

    Book value per common share is a formula used to calculate the ...
Related Articles
  1. Investing

    Investment Value Vs. Fair Market Value: How They Differ

    Learn about the differences between an asset's investment value and its fair market value, including why many think fair market value is unrealistic.
  2. Investing

    Investing By The Book

    Buying below book value can provide investors with a safe and consistent investment approach.
  3. Investing

    Using The Price-To-Book Ratio To Evaluate Companies

    The Price-To-Book (P/B) ratio can be an easy way to determine a company's value, but it isn't magic!
  4. Investing

    Deep Discount-To-Book Value Stocks

    With the right company, buying at a discount-to-book value could prove fruitful.
  5. Investing

    What Is The Value In Value Investing?

    Value investing has its advantages, but it also has significant drawbacks. We look at the pros and cons.
  6. Investing

    Mark-To-Market: Tool Or Trouble?

    Mark-to-market accounting can be a valuable practice, but all bets are off when the market fluctuates wildly.
  7. Investing

    Does Active Value Investing Pay Off?

    Learn about a well-researched paper that explores why active value investors underperform, and how value investing might be beneficial for your portfolio.
  8. Investing

    Depreciation: Straight-Line Vs. Double-Declining Methods

    Appreciate the different methods used to describe how book value is "used up".
RELATED FAQS
  1. How Are Book Value and Market Value Different?

    Book value and market value are two financial metrics used to determine the valuation of a company and whether the stock ... Read Answer >>
  2. How Are Book Value and Intrinsic Value Different?

    Book value and intrinsic value are two ways to measure the value of a company. Find out which is known as the true value ... Read Answer >>
  3. What is the difference between carrying value and fair value?

    Learn about the carrying value and fair value of assets and liabilities, what the carrying and fair value measure and the ... Read Answer >>
  4. What is the difference between economic value and market value?

    Learn about the differences between economic value and market value. Discover how they serve different purposes for businesses ... Read Answer >>
  5. What are the generally accepted accounting principles for inventory reserves?

    As with most matters related to generally accepted accounting principles (GAAP), accountants assigned with the task of applying ... Read Answer >>
  6. Intrinsic Value vs Current Market Value

    Discover the differences between intrinsic and market values, what makes the former difficult to determine, and how investor ... Read Answer >>
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center