A write-down is a downward adjustment in the recorded value of an asset in a person's or company's books. The reduction in overall value of assets is counted as an expense and a write-down may make someone eligible for deductions on tax liability, depending on its type. Write-downs vary in nature from asset depreciation recorded by small business owners on their taxes to adjustments to book value made by financial institutions at the end of financial reporting periods to comply with market to market accounting rules.
In a write-down, rather than carrying an asset at an inflated value, people record the fair market price. Certain kinds of assets, like furniture and cars, depreciate on a schedule, allowing people to mark them down and count it for tax purposes while those assets are in service. Other assets like investments may experience rises and falls in value and these changes can be recorded with write-downs and write-ups. Financial institutions may be required to record these changes to make sure their books are as accurate as possible, with the goal of avoiding situations where companies overstate the value of their assets and mislead investors.
Loans like mortgages are usually carried at their stated value and will not be written down. This practice is controversial in some regions, as it means financial institutions can carry non-performing assets at an inflated value; investors may think the institution has more assets than it really does, because the loans are not reduced in value. Financial regulators may require a company to initiate a write-down of its loans with the goal of adjusting its value and making it more accurate. This will result in losses or expenses, depending on how the company does its accounting, and may undermine investor confidence.
Individuals can also use write-downs for various activities. When people lose assets to damage, theft, and other activities, they can write them down in order to receive benefits like insurance payments or reductions of tax liability. As with corporations, overstating the value of assets can be legally dubious; a person who claims more assets than she has might mislead lenders and other people, for example, taking advantage of the situation to access credit and other benefits.
When regulators order write-downs of assets, they do so in the interests of adjusting accounting records to make them more detailed and accurate. This is done during an evaluation of a company, particularly companies in financial trouble. The write-down may be reported in the media if the company is publicly traded and has a high profile.
