Meaning
Accounting adjustments reduce the book value of an asset on the balance sheet without resulting in an immediate outflow of corporate cash. Implementing a non cash write down occurs when the fair market value of an asset, such as goodwill or obsolete inventory, falls below its recorded historical cost.
Asset Revaluation
Periodic tests evaluate whether the carrying value of long-term assets is still supported by the cash flows they are expected to generate. When the projected earnings of a subsidiary decline, the associated goodwill must be reduced to its new estimated value. This accounting correction ensures that the balance sheet does not present an overstated picture of the company’s assets.
Valuation experts perform these analyses annually during the preparation of the corporate audit.
Income Impact
Financial statements show a reduction in net income during the quarter the adjustment is recorded, even though the company’s bank balance is unaffected. This reduction can affect the company’s stock price and can trigger breaches of certain net-worth covenants.
Tax Treatment
Fiscal authorities have strict rules regarding when these book adjustments can be used to reduce taxable income. In many jurisdictions, the loss is only deductible for tax purposes when the asset is actually sold or disposed of.
