Write-Down
Candlefocus EditorThe most common instance in which an asset write down is used is when there is impairment in the asset value. When an asset such as real estate, equipment, machinery, or an intangible such as patents become impaired, the value of the asset must be adjusted on the company’s balance sheet and an appropriate amount must be reported as an expense on the income statement. This impairment loss is calculated by taking the difference between the asset’s carrying value and the amount of cash it could yield if it were sold in the most optimal manner. These losses must be recognized in the company’s financial statements, whether or not the asset has been disposed of.
In addition, when an asset is labeled “held for sale” or is expected to be sold, the write-down should include the estimated costs of the sale. These estimated costs and any other write-down adjustment must be reported on the company’s financial statements. Additionally, the write down of an asset cannot be reported as a deductible expense on the company’s taxes until the asset is actually sold or disposed.
In sum, an asset write-down is an accounting practice used to adjust the carrying value of an asset if its fair market value has decreased to a level below its book value. The accounting write-down is necessary to report the impaired asset’s value accurately and fairly in the company’s financial statements. It is also important to note that any deductions for the write down won’t be reported on the company’s taxes until the asset is actually sold or disposed.