Question

Walkin Inc. is considering the write-down of its long-term plant because of a lack of profitability. Explain to the management of Walkin how to determine whether a write-down is permitted.

Short answer

The accounting standards require that if events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable, then the carrying amount of the asset should be assessed.

Step-by-step solution

Meaning of Write-Down 

During a write-down, a business reduces the carrying amount of an asset in a way other than by depreciating and amortizing.The value of an asset is usually written down when its market value drops below its carrying amount.

Explaining to the management of Walkin to determine whether a write-down is permitted.

If events or changes in circumstances suggest that the carrying amount of such assets may not be recovered, the carrying amount of the asset must be reviewed, according to accounting principles. The evaluation or review takes the form of a recoverability test, which compares the carrying amount to the total of the asset's estimated future cash flows (undiscounted).

The asset has been impaired if the cash flows are less than the carrying amount. The impairment loss is calculated as the difference between the carrying amount and the asset's fair value. If there is an active market for the item, its fair value is determined by its market value. If there isn't a market price for the asset, the present value of the asset's estimated future net cash flows might be utilized instead.