What Is A Write Down?
A write down (also written as "writedown") is an accounting procedure in which a company reduces the value of an asset on its balance sheet to reflect its current, lower market value. A write down is also included on the company's income statement as an expense, which reduces its operating income.
Write downs occur in all types of companies, although they may occur more often in the financial industry. Banks write down the value of their loan portfolio when they believe they won't be able to collect the full value of some loans.
Write Down Example
For example, a bank has made a US$1 million loan to ABC Corp., but now believes it will only be able to collect on half of it as ABC has filed for bankruptcy. So it writes down the value of the loan to US$500,000 on its balance sheet and reduces its operating income by the same amount. Alternatively, if it believes it stands to get back only half the principal, it sells the loan to another bank for US$500,000, writing down the remaining US$500,000.
Where Else Are Write Downs Used?
Outside of banking, a real estate company may write down the value of a building that has lost market value, and a manufacturing company may write down the value of its factories or equipment that have become outdated.
Publicly-traded companies update the estimated value of their assets quarterly. In the case of financial companies, a large write down of assets may require a bank to increase its capital to protect itself against potential losses.
However, write downs also have tax advantages. In the U.S., at least, write downs are deductible from corporate income taxes. Companies often choose to take write downs all at once, such as after a particularly bad quarter, in order to release all of the bad news at once.
Write Offs And Write Ups
A write off occurs when the company reduces the value of the asset to zero, such as when a bank believes that it won't be able to collect any money on a loan because the borrower declared bankruptcy. The opposite of a write down is a write up, in which the company increases the value of assets to match their current market value.
A write down is an accounting procedure in which a company reduces the value of an asset, such as a loan, on its balance sheet to reflect its current, i.e., lower, market value. A write down also shows up on the company's income statement as an expense, which reduces its operating income. A write off occurs when a company writes down the asset value to zero. A write up is the opposite of a write down, meaning the asset's value has increased.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation of Technical Analysts. He is a full member of the Society of Technical Analysts in the United Kingdom and combined with his over 20 years of financial markets experience provides resources of a high standard and quality. Russell analyses the financial markets from both a fundamental and technical view and emphasises prudent risk management and good reward-to-risk ratios when trading.
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