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Writedown

A Writedown (also known as an `Impairment Charge`) is an accounting maneuver where a company reduces the stated value of an `Asset` on its `Balance Sheet`. Think of it as a company's admission that something it owns isn't worth what it used to be. This happens when the asset's fair market value has fallen below its carrying value—the original cost minus accumulated depreciation. For example, if a company bought a factory for €10 million but now, due to a market crash, it's only worth €7 million, the company must “write down” the asset by €3 million. This €3 million reduction is recorded as an expense on the `Income Statement`, which directly lowers the company's reported `Net Income` for that period. While often used interchangeably, a writedown typically means a partial reduction in value, whereas a write-off implies the asset is now considered completely worthless and its value is reduced to zero.

Why Do Companies Write Down Assets?

Writedowns are the skeletons in a company's closet finally coming to light. They are often the result of past decisions that didn't pan out. Here are the most common culprits:

The Writedown's Ripple Effect on Financial Statements

A writedown is a `Non-cash Charge`, which is a critical concept for investors to grasp. This means that while it reduces reported profits, no actual cash leaves the company's bank account when the writedown occurs. The cash was already spent, perhaps years ago, when the asset was first acquired. Here's how it impacts the big three financial statements:

A Value Investor's Perspective on Writedowns

Writedowns are often a confession of past mistakes, but how an investor reacts depends on the context. Is it a symptom of a terminal illness or the financial equivalent of a bad haircut that will eventually grow back?

A Red Flag or a Green Light?

Key Questions to Ask

When you see a company announce a writedown, put on your detective hat and ask: