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Aaron Freshwater

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A write-down is what occurs when a company reduces the value of an asset on their books. It is distinct from a write-off in that it only reduces the value of an asset on the balance sheet, rather than eliminating it completely. This results in a charge against earnings. For instance, if a company has a building on their books valued at $1,000,000 but an internal audit reveals that its market value is actually $800,000, this would result in a $200,000 write-down which would be deducted from reported earnings. Successive increases in value of the same asset would be charged to earnings.

Many of the consequences of the subprime crisis at financial institutions in 2007 and 2008 are referred to as a "write-down," which is similar to a "write-off." While a write-down decreases the value of an asset in the company's balance sheet, a write-off completely eliminates the value of the loan from the balance sheet. Many companies during the subprime mortgage crisis had a combination of both write-offs and write-downs.

The term write-off (or write-down) describes a reduction in recognized value. In accounting terminology, it refers to recognition of the reduced or zero value of an asset. In income tax statements, it refers to a reduction of taxable income as recognition of certain expenses required to produce the income. Write-off is also used in vehicle insurance to describe a vehicle which is cheaper to replace than to repair, sometimes known as being a totaled car (a total write-off).

[edit] Income tax

In income tax calculation, a write-off is the itemized deduction of an item's value from one's taxable income. Thus, if a person has a taxable income of $50,000 per year, a $100 telephone for business use would lower the taxable income to $49,900. If that person is in a 25% tax bracket, the tax due would be lowered from $7,481 to $7,456. Thus the net cost of the telephone is $75 instead of $100.

[edit] Accounting

In business accounting, the term write-off is used to refer to an investment (such as a purchase of salable goods) for which a return on the investment is now impossible or unlikely. The item's potential return is thus canceled and removed from ("written off") the business's balance sheet. Common write-offs in retail include spoiled and damaged goods.

[edit] Banking

Banks, or other institutions that lend money, consider loans given as assets. To a lender, the loan represents a future stream of income, so it has value to the company. If, however, the debtor (borrower) cannot pay back this loan - mortgage payments are too high, credit card debt is excessive, whatever the reason may be - the bank must recognize that this asset has been impaired. It's value is now less than originally expected. When the asset value decreases, the new value is placed on the balance sheet, and the impairment is transferred to the income statement as a charge against earnings.

[edit] Negative Write-offs

A negative write-off is the opposite of a write-off. That is, it is term used to refer to an overpayment amount that will not be refunded to the individual or organization that has overpaid on a claim. Negative write-offs can sometimes be seen as fraudulent activity because those who overpay a claim or bill are not informed that they have overpaid and are not given any chance to reconcile their overpayment or be refunded.

Some institutions such as banks, hospitals, universities, and other large organizations regularly perform negative write-offs, especially when the amount that is considered low dollar, i.e. $5.00 at some places or up to $15.00 or more at others.^{[citation needed]}

[edit] Write-down

A write-down is an accounting treatment that recognizes the reduced value of an impaired asset. The value of an asset may change due to fundamental changes in technology or markets. One example is when one company purchases another and pays more than the net book value of its assets and liabilities. The excess purchase price is recorded on the buying company's accounts as Goodwill . If it becomes apparent that the purchased company no longer has the value recorded in the goodwill account (it can't be resold at the same price), the value in the goodwill asset account is "written down."

A write-down is sometimes considered synonymous with a write-off.^[1] The distinction is that while a write-off is generally completely removed from the balance sheet, a write-down leaves the asset with a lower value.^[2] As an example, one of the consequences of the 2007 subprime crisis at financial institutions was a revaluation under mark to market rules:

"Washington Mutual will write down by $150 million the value of $17 billion in loans...":^[3]

[edit] References

1. ↑ Definition: Write-down. Webster's Online Dictionary. Retrieved on 2008-09-08.
2. ↑ Write-down. Investopedia. Retrieved on 2008-09-08.
3. ↑ Washington Mutual 3Q Earnings to Tumble. Washington Post. Retrieved on 2008-09-08.

[edit] External links

• SMALL BALANCE WRITE OFF POLICY for University of Missouri Hospital
• Small Dollar Balance Policy at Purdue University
• ALACHUA COUNTY Policy on Removal of Uncollectible Accounts from the Financial Statements (Amended)
• 696200 Miscellaneous Transaction Code is used for small dollar balances at Duke University