A write-down reduces an asset’s carrying amount, the figure it currently sits at in the accounts, to the lower figure the measurement rule governing that asset requires. The asset stays on the books at the reduced amount, and the reduction runs through earnings in the period it is recognized. Write-down is not the name of a single standard but the common name for what several different measurement rules produce, so the first question about any asset is which rule governs it.
Write-Down Versus Write-Off
A write-down is a partial reduction and a write-off is a complete removal of the carrying amount. After a write-down the asset is still an asset, carried lower; after a write-off nothing of it is left on the balance sheet.
Federal tax law splits bad debts along the same line, in the two paragraphs of one subsection. A deduction is allowed for any debt which becomes worthless within the taxable year, while for a debt recoverable only in part the Secretary may allow a deduction in an amount not in excess of the part charged off within the taxable year (26 U.S.C. 166(a)).
The book side is less tidy than that rule of thumb. Writeoffs of financial assets may themselves be full or partial (FASB Accounting Standards Update 2016-13, paragraph 326-20-35-8), so partial against total describes which word practitioners usually reach for rather than a boundary every standard enforces.
Which Rule Produces the Write-Down
One route runs through net realizable value, the amount the goods are expected to bring in net of what it still costs to finish and sell them. Inventory measured using any method other than last-in, first-out (LIFO) or the retail inventory method is measured at the lower of cost and net realizable value (FASB Accounting Standards Update 2015-11, paragraph 330-10-35-1B). The carve-out that keeps LIFO and retail-method inventory under a different test, and a worked reduction, are in net realizable value; the causes that push goods off cost are in obsolescence.
A long-lived asset held and used works differently, because a fall in value alone does not produce a write-down there. The reduction follows a recoverability test, and that mechanism, with the separate goodwill test run at the reporting unit, is in impairment losses.
Receivables reach the same place through a valuation account rather than a strike against any one customer balance, so the asset is presented net while the invoices stay on the ledger. That account is allowance for doubtful accounts, and the charge that funds it is bad debt expense.
How a Write-Down Behaves in the Close
A write-down usually reaches the books as a period-end adjusting entry rather than as a transaction during the month, because it records a measurement and not an exchange with anyone. The entry debits a loss or expense account and credits either the asset or a valuation account standing against it, on the same mechanics as any other adjusting entry.
The reduced figure then becomes the number the asset is carried and measured from. In the case of goods which have been written down below cost at the close of a fiscal year, such reduced amount is to be considered the cost for subsequent accounting purposes (Accounting Research Bulletin No. 43, Chapter 4, paragraph 5 and footnote 2). For a long-lived asset the same idea arrives as an explicit bar on restoring a previously recognized impairment loss (FASB Statement No. 144, paragraph 15). An inventory write-down and an impairment of a long-lived asset held and used are not restored under US GAAP when values recover, and where IFRS parts company is in GAAP vs IFRS.
What a Write-Down Is Not
It is not a shortfall in quantity. A write-down prices goods the business still has, while shrinkage counts goods it no longer has.
It is not an unrealized mark either. An unrealized gain or loss moves in both directions as the price moves and leaves the asset’s basis alone, while a write-down runs one way and resets the amount the asset is carried and measured from.
The phrase also carries a plain non-accounting sense, to put something on paper, which shares nothing with the accounting term except its spelling.
Common Questions
Written down is the past participle, and it describes an asset the reduction has already been applied to. A batch of inventory that has been written down is carried at the reduced amount, and later periods measure from that amount rather than from its original cost.
In accounting there is no exact synonym, because the precise name is whichever measurement produced the reduction, an impairment loss on a long-lived asset or a lower-of-cost-and-net-realizable-value adjustment on inventory outside LIFO and the retail method. A markdown is not a substitute, since that word cuts a selling price rather than a carrying amount. In the ordinary sense of the phrase, note down and jot down are the everyday alternatives.
Establish which rule governs the asset, measure the lower figure that rule specifies, recognize the difference as a loss in the period, then carry the asset forward at the reduced amount. The order matters, because the rule sets both the comparison and the amount the asset is carried at afterward.
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