A Closer Look at Discretionary Writedowns of Impaired Assets

An asset is considered "impaired" when its book value exceeds some measure of its "fair" value. When a company recognizes this impairment and subsequently records the effect by decreasing the book value of the asset and debiting an income statement account, the company has recorded a writedown. Asset writedowns are often recorded in conjunction with, or under the title of, restructuring changes. A total of 77 writedowns by 67 firms were examined. Because of the unusual nature of the transaction, most of the writedown companies identified highlight the loss in their financial statements, particularly in their income statements. It is shown that the writedowns occur primarily in the 4th quarter of the fiscal year, probably because of the more extensive review due to the budgeting and audit processes taking place during that period. The majority of the companies wrote down their assets in a period of already below normal earnings, but 25% offset the writedown with other gains or unusually high earnings.