Definition: A write down is an accounting transaction in which the value of an asset is reduced to match its current market value. In other words, the asset gets devalued because it worth less than what is currently recorded.
What Does Write Down Mean?
Write down transactions are often necessary when there is an adverse economic environment. For example, financial companies must write down assets that are currently overvalued when compared to market prices. This write downs are then transferred to the income statement as an extraordinary expense. By writing down the value of an asset the company reflects more accurately its current financial situation. Nonetheless, write downs are not a thing of financial companies only.
Many different companies make write downs to value their assets properly. To sum up, the purpose of such transactions is to reflect the fair value of all the assets held by a company. There’s a tax advantage on writing down, since the loss creates a paper expense that is tax deductible. This means that a write down will reduce the tax bill of the company.
Example
Wallets Online Co. is a company that sells wallets for men trough the internet. As part of a diversification strategy the company invested $50,000 on Shoes for People LLC. The company did this by buying the company stocks at $25 per share. Recently, Shoes for People filed for bankruptcy and the stock went down to $5 per share. Financial analysts agree that the company will be liquidated and they forecast that the final liquidation value would be around $7 a share. Should Wallets Online write down the investment from his books?
According to our definition, a write down is an accounting transaction in which the value of an asset is reduced to match its current market value. The current market value of this investment is not $50,000 as it was. In the best case scenario, the value of this investment will be $14,000 (a $26,000 loss). The company must write down the value of this asset to reflect more accurately its current financial situation, therefore transferring an extraordinary expense of $26,000 to its income statement, due to a loss on stock investments.
