Write Down Definition & Example
Write Down Definition
A write down occurs when a bank reduces the book value of an asset to its true market value. This practice of writing down bad assets to their current value allows a company to display the true value of the company on the income statement. A write down is calculated by subtracting the purchase price of an asset less the amount it could be sold for on the open market. The end result of the write down is that it reduces the net income of the company.
Write Downs and the Sub prime Mortgage Crisis
Write downs have been around for a very long time, but it wasn't until the sub prime mortgage crisis that it received such interest from the public. Many investment banks and financial institutions were forced to write down billions of dollars of highly rated credit default swap obligations. This ended in billions of dollars worth of losses for the companies forcing dozens of banks out of business.
Write Down - Real Life Example
The recent credit crisis has hit a number of business, but one industry that was hit hard was the homebuilders. For the 2008 fourth quarter, Toll Brothers had to write down a $175.9 million dollars on land they have had to walk away from due to the lack of demand. This is because the land purchased years ago is worth far less due to the slowing market. Robert Toll, Chief Executive of Toll Brothers stated that the U.S. government's plans to reduce mortgage rates will "be a catalyst to stimulate customer demand."