A write-down in accounting is a formal reduction of an asset’s recorded value on the books when its market worth has fallen below what the company originally paid. The adjustment is booked as a non-cash loss on the income statement and lowers total assets on the balance sheet, giving investors and lenders a more honest picture of what the business actually owns. Accounting standards require companies to recognize these losses as soon as they can be measured, rather than waiting to see whether value recovers.
Write-Down vs. Write-Off
People use these terms interchangeably, but they describe different situations. A write-down is a partial reduction: the asset still has some value, just less than the books say. A piece of equipment purchased for $100,000 that’s now worth $60,000 gets written down by $40,000, and the equipment stays on the balance sheet at the reduced figure. A write-off removes the asset’s value entirely. If a customer’s receivable is deemed completely uncollectible, the full balance is eliminated from the books.
The mechanical difference matters. A write-down keeps the asset on the ledger at a lower amount; a write-off zeroes it out.
When a Write-Down Is Required
Different asset types follow different accounting standards, but the underlying logic is the same. When the books overstate what something is worth, the number has to come down. The specific triggers and tests vary by category.
Inventory
For companies using FIFO or average cost methods, inventory must be measured at the lower of cost or net realizable value, defined as the estimated selling price minus the costs to complete and sell the goods. This replaced the older “lower of cost or market” framework for these methods after the Financial Accounting Standards Board simplified the rules through Accounting Standards Update 2015-11.1Financial Accounting Standards Board. Accounting Standards Update No. 2015-11 – Simplifying the Measurement of Inventory Companies still using LIFO or the retail inventory method continue to apply the traditional lower of cost or market test. Common triggers include physical damage, a permanent drop in demand, and technological changes that make products obsolete.
Long-Lived Assets
Property, equipment, and other long-lived assets follow a two-step process under ASC 360. First, the company tests whether the asset’s carrying amount is recoverable by comparing it to the total undiscounted future cash flows the asset is expected to generate. If the carrying amount exceeds those undiscounted cash flows, the asset fails the recoverability test. Second, the company measures the impairment loss as the gap between carrying amount and fair value. Triggers for the test include a sharp decline in market price, a major change in how the asset is used, significant cost overruns during construction, or a history of operating losses tied to the asset.
Goodwill and Intangibles
Goodwill, the premium paid in an acquisition above the fair value of identifiable net assets, must be tested for impairment at least once a year. The test compares the fair value of the reporting unit carrying the goodwill to its carrying amount, including goodwill. If the carrying amount exceeds fair value, the company records an impairment loss for the difference, capped at the total goodwill balance assigned to that unit.2Financial Accounting Standards Board. Goodwill Impairment Testing Indefinite-lived intangibles like trademarks or broadcast licenses follow a similar annual test, comparing carrying value to fair value without the undiscounted cash flow step used for finite-lived assets.
Calculating the Amount
The calculation starts with carrying value: the original cost minus any accumulated depreciation or amortization recorded since acquisition. That number is compared to the asset’s current fair value, typically defined as the price a willing buyer would pay in an orderly transaction. Determining fair value often requires an outside appraisal, a review of recent comparable sales, or a discounted cash flow analysis.
If fair value falls below carrying value, the difference is the write-down. Suppose a company owns a machine with an original cost of $200,000 and accumulated depreciation of $150,000, giving it a carrying value of $50,000. An independent appraisal values the machine at $35,000. The write-down is $15,000. Every dollar of that reduction needs documentation, because auditors and regulators will scrutinize whether the amount is justified or arbitrary.
Recording the Journal Entry
The basic entry has two sides. The company debits a loss account, commonly labeled “Impairment Loss” or “Loss on Write-Down,” and credits either the asset account directly or a contra-asset account. Which approach fits depends on the asset type and the company’s accounting policies.
Direct Reduction
Under this approach, the credit goes straight to the asset account, permanently lowering its balance. Using the machine example above:
- Debit Impairment Loss $15,000
- Credit Machinery $15,000
After posting, the machine’s balance on the ledger drops from $50,000 to $35,000. The method is straightforward but makes it harder to track the original cost separately from accumulated impairment charges.
Allowance Method
For inventory write-downs, many companies prefer crediting a contra-asset account, often called “Allowance for Inventory Obsolescence,” rather than reducing the inventory account directly:
- Debit Loss on Inventory Write-Down $15,000
- Credit Allowance for Inventory Obsolescence $15,000
The advantage is that the original inventory cost stays visible in the general ledger while the contra account shows the cumulative reduction. When the inventory is eventually sold or disposed of, both the inventory balance and the allowance get cleared in a single closing entry. That separation gives management and auditors a cleaner trail of how much value has been lost over time versus what was originally on the books.
Impact on the Financial Statements
A write-down ripples through every major statement, and the effects are immediate.
Balance Sheet
The asset account, or its contra account, reflects a lower balance, which reduces total assets. Because the accounting equation must stay in balance, that reduction flows through to equity via lower retained earnings. Creditors watching debt-to-equity ratios or asset coverage covenants will see the shift, and a large enough write-down can push a company past a loan covenant threshold.
Income Statement
The impairment loss appears as a line item that reduces net income for the period. No cash actually leaves the business, but reported earnings drop. For public companies, this can affect earnings per share and trigger analyst downgrades. The loss typically sits within operating expenses, though the exact placement depends on the nature of the asset and the company’s presentation choices.
Disclosures
Public companies must disclose material write-downs in their financial statement footnotes. Required details generally include a description of the impaired asset, the facts and circumstances that led to the impairment, the dollar amount of the loss and where it sits on the income statement, and the method used to determine fair value.
Tax Treatment Is Different
This is where companies get tripped up. A write-down that is perfectly valid under accounting standards does not automatically produce a tax deduction. The IRS and the accounting rule-makers operate on different timelines and with different standards of proof.
For tax purposes, inventory must be valued using a method that conforms to best accounting practice and clearly reflects income.3Office of the Law Revision Counsel. 26 USC 471 – General Rule for Inventories That sounds permissive, but the Supreme Court significantly tightened the standard in Thor Power Tool Co. v. Commissioner. The Court held that a company cannot deduct an estimated future loss on excess inventory just because the write-down follows generally accepted accounting principles. The IRS requires objective evidence, such as actual sales at reduced prices, documented offerings below cost, or proof that goods are defective, before it will allow a deduction.4Legal Information Institute (LII) / Cornell Law School. Thor Power Tool Company v. Commissioner of Internal Revenue A management estimate that inventory has lost value is not enough on its own.
The gap is even wider for property and equipment. A company might record a book impairment loss this year under ASC 360, but the IRS generally will not allow a loss deduction under Section 165 until the asset is actually disposed of, meaning sold, abandoned, or scrapped.5Office of the Law Revision Counsel. 26 USC 165 – Losses The tax code requires a loss to be “sustained during the taxable year,” and the implementing regulations interpret that as requiring a closed, completed transaction or an identifiable event that fixes the loss.6eCFR. 26 CFR 1.165-1 – Losses Determining that an asset has declined in value does not meet that bar.
The timing mismatch between the book loss and the tax deduction creates what accountants call a temporary difference. The company records a deferred tax asset reflecting the future tax benefit it expects to receive when the asset is eventually disposed of and the deduction materializes.
Can a Write-Down Be Reversed?
Once a company records a write-down on a long-lived asset, goodwill, or an indefinite-lived intangible, the reduced value becomes the new cost basis. If the asset’s market value later recovers, US GAAP prohibits reversing the impairment loss. The written-down figure is the permanent starting point for all future depreciation and any subsequent impairment tests.
Inventory gets a narrow exception. If inventory was written down during an interim period, say the first quarter, and its value recovers before the fiscal year ends, the company can recognize a gain in the later interim period, but only up to the amount of the previously recognized loss.1Financial Accounting Standards Board. Accounting Standards Update No. 2015-11 – Simplifying the Measurement of Inventory Once the fiscal year closes, that window shuts.
Companies reporting under International Financial Reporting Standards face different rules. IAS 36 allows reversal of impairment losses on assets other than goodwill when the estimates that drove the original impairment have changed.7IFRS Foundation. IAS 36 – Impairment of Assets That distinction matters for multinational companies and anyone comparing financial statements across jurisdictions. Under both frameworks, goodwill impairment losses are permanent, with no reversal allowed.