What is Book Value Reduction?

A book value reduction lowers the value at which an asset is carried on the books. This reduction occurs because changes in the asset or market conditions have reduced its current market value.

Understanding Book Value Reduction

Book value reduction is a non-cash charge recorded in the 澳洲幸运5官方开奖结果体彩网:general ledger. It includes a reduction to the value of an asset on the 澳洲幸运5官方开奖结果体彩网:balance sheet, as well as an offsetting expense. As such, it also reduces 澳洲幸运5官方开奖结果体彩网:net income on the 澳洲幸运5官方开奖结果体彩网:income statement in the same accounting period in which the boo🧜k value reduction is identified and booked. Under some circumstances, the book value reduction and related expense can be a hefty figure that may result in significant losses for the reporting entity.

Since it is regarded as an 澳洲幸运5官方开奖结果体彩网:unusual item, companies usually report generally accepted accounting principles (GAAP) net income (or loss), taking into account the book value reduction charge, as well as a "澳洲幸运5官方开奖结果体彩网:pro forma" or 澳洲幸运5官方开奖结果体彩网:non-GAAP earnings that excludes the charge. A book value reduction is more commonly called an asset 澳洲幸运5官方开奖结果体彩网:write-down or impairment in the popular press.

Requirements for Book Value Reduction

While GAAP requires a reduction in book value of an asset if there has been significant impairment, it would be impossible to test all assets for such impairment on a monthly or quarterly basis. Therefore, GAAP specifies guidelines about when such impairment tests should be made. Specifically, 澳洲幸运5官方开奖结果体彩网:property, plant, and equipment and finite-life 澳洲幸运5官方开奖结果体彩网:intangible assets — which are 澳洲幸运5官方开奖结果体彩网:depreciated or 澳洲幸运5官方开奖结果体彩网:amortized over time — should be tested for impairment wh𓆉en market or asset changes suggest the book value of the asset may be overstated and not fully recoverable.

A test for possible book value reduction may be indicated in a number of situations. These include a substantial decrease in market price, an adverse 🐼change in the physical condition of the asset, economic conditions, a negative political change in the country where the asset is located, and so on.

Under GAAP, intangible long-lived assets that are not subject to amortization, like goodwill, should be evaluat🐎ed for impairment at least annually.

GAAP vs. IFRS Differences

The accounting rules regarding the reversal of book value reductions differ between GAAP and International Financial Reporting Standards (IFRS). For example, U.S. GAAP prohibits the reversal of previous inventory write-downs, but IFRS permits them under certain circumstances. On the other hand, both GAAP and IFRS prohibit reversals of goo🐽dwill write-downs.

Example of Book Value Reduction

A book value reduction is recorded in a 澳洲幸运5官方开奖结果体彩网:journal entry as a decrease in value to an asset account, a credit, and an increase to an expense account, a debit. For example, assume ABC Company, a video streaming service, acquired XYZ Corp, a 澳洲幸运5官方开奖结果体彩网:brick-and-mortar movie store chain, 10 years ago. ABC recorded $10 million of goodwill at the time of 澳洲幸运5官方开奖结果体彩网:acquisition. Every year, under GAAP, it is required to reassess the value of its reported goodwill to determine if it is still accurate or if a 澳洲幸运5官方开奖结果体彩网:goodwill impairment has been incurred.

ABC Company is performing their annual goodwill test and determines that the demand for physical video rentals and purchases is down significantly from the time they acquired XYZ Corp. They also determine the likelihood of a rebound in this market is unlikely in the future. Since goodwill is impaired, a book value reduction🤪 is in order. ABC's accountants will record🌞 a journal entry to credit the goodwill asset account and debit a goodwill impairment expense account. The expense will lower ABC's reported net income on its next reported income statement.

Special Considerations

Financial analysts keep a close eye out for changes in book value estimates. When a company writes down asset levels unexpectedly and with little economic justification, it can signal trouble. Public companie🐽s will go to great lengths to explain adjustments through their corporate communications and investor relation🍰s teams.