Sunday, 5 February 2012

Taking a Hit - Accounting Write Off or Write Down

Corporate accountants write off or write down items under several sets of circumstances.

  • They may write a debt off the books that they are convinced will never be collected.
  • They may mark down the value of an asset that is no longer worth what it once was.

Excessive write-offs in one year can, in some circumstances, lead to greater than normal profits in the next.  It is an old management trick to take all write-offs or write-down during a period when earnings aren't looking so good anyway.  

  • The company decides to load all the bad news into one accounting period rather than several fairly bad ones, but the contrast between the bad quarter or year and the subsequent good one appears dramatic.
  • This jump in earnings thrills the investing public (the company did lousy last year, but look how it's come around!)  But again, the better earnings may turn out to be a  brief aberration.  The following year the company's earnings fall back into the old ways.

Yet done frankly and for the right reasons, write-downs may lead to real and long-lasting improvement in earnings.  

  • They make a difference when the company is saying:  "This was a problem; we've faced up to it.  The adjustment will allow the income statement to accurately reflect the condition of our company in the years ahead."

For alert investors, losses or gains that result from a single episode can be a boon.

  • If other investors overreact to the news in either a positive or negative way, it may create a chance to buy or sell at an advantageous price.

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