Legal Definitions - write-down

In accounting, a write-down occurs when a company reduces the recorded value of an asset on its financial statements because the asset's market value or usefulness has significantly decreased.

Essentially, it's an acknowledgment that something a company owns is no longer worth what it was originally valued at, leading to a reduction in its book value and often recognized as an expense or loss.

• Example 1: Obsolete Inventory

  A large electronics retailer purchased a substantial quantity of a particular model of smartphone. However, a newer, more advanced model was released much sooner than anticipated, causing the older model to become less desirable and its market price to plummet.

  How this illustrates "write-down": The smartphones are an asset (inventory) for the retailer. Because their market value has significantly decreased due to obsolescence, the retailer would perform a write-down to adjust the recorded value of these phones on their balance sheet to reflect their current, lower selling price. This action acknowledges the loss in value.

• Example 2: Impaired Equipment

  A construction company owns several heavy-duty excavators. One of these excavators was severely damaged in an accident and, despite repairs, its operational efficiency is permanently reduced, and its resale value has fallen drastically compared to its original cost, even after accounting for depreciation.

  How this illustrates "write-down": The excavator is an asset. Its value has been impaired due to damage, meaning it can no longer generate the same economic benefits or command the same price as before. The company would execute a write-down to lower the excavator's recorded value on its books to reflect its diminished worth, recognizing the difference as a loss.

• Example 3: Depreciated Real Estate Investment

  A real estate investment firm purchased a commercial building in a downtown area with plans for extensive renovation and resale. However, a major employer in the city announced it was relocating its headquarters, leading to a significant decrease in demand for commercial space and a sharp decline in property values in that specific area.

  How this illustrates "write-down": The commercial building is an asset for the investment firm. Due to adverse market conditions (the employer's relocation), the building's fair market value has fallen below its original purchase price. The firm would perform a write-down to adjust the building's value on its financial statements to its current, lower estimated market value, reflecting the loss incurred.