A write-down is when a business admits that something it owns is worth less than previously thought. Write-downs can be painful, both emotionally and financially.
A Bad Look For You
Ever look through your closet and realize that some of the outfits aren’t so good anymore? Maybe a moth ate holes in them, or you’ve realized the colors are really bad?
As painful as it is to admit that an outfit you paid good money for is no longer wearable, it’s worse to just leave it in the closet forever. If you’re honest with yourself and purge it, you’ve essentially just done a ‘write-down.’
Every company has assets on its ‘books’ (accounting statements). Like buildings and equipment, or investments that are expected to pay off profitably in the future. Each asset has a stated value, based on the company’s best estimate of what they could sell it for or how much profit it can generate.
But sometimes, like your outfits, these assets lose value. And if a company’s honest, they’ll reduce its stated value on their books. If they reduce it all the way to zero, that’s called a ‘write-off.’
Oil companies, for example, have recently have been writing down the value of their oil and gas reserves by tens of billions of dollars. Because oil and gas prices are dropping, so the reserves are worth less because they won’t generate as much profit.
In fact, the whole energy sector is writing down the value of fossil-fuel assets (e.g. pipelines, power plants, wells and mines) as the global transition to cheaper, cleaner, renewable energy sources accelerates.
Write-downs are a way of admitting that you made a big mistake (like misjudging future energy demand). The consequences for large companies can be dramatic – like investors dumping their stock.
So next time you’re going through your closet and find some bad outfits, don’t worry too much.
It could be worse… you could be an oil company executive.