sfgate.com
BUSINESS INSIDER -- The Mailbag: Explaining Charges,
Write-offs and Write-downs
Also, are bond funds a safe haven during a stock correction?
Herb Greenberg
First up this week is e-mailer Eltoro, who writes: ''What is the difference between a 'charge,' a
'write-down,' and a 'write-off,' and how do they affect the investor? I don't have time to take a college
course in financial accounting and I haven't been able to find them discussed in any of the popular books
on investing. How do they impact a company's earnings statement? Are they out-and-out losses? Do
they bring good news or bad news for a company's future?''
Yes, no and maybe.
Charge, write-off and write-down all mean the same thing in the sense that in the eyes of the accounting
world they reduce earnings. A charge by definition is an expense. New York University accounting
professor Paul Brown says the type of ''charges'' you're talking about are used loosely as a dumping
ground for a variety of restructuring and merger expenses. Write-downs and write-offs usually refer to a
company's decision to take a loss on some sort of hard asset, such as plants, property and equipment or
even inventory.
The result of any extraordinary charge is usually a one-time hit to net income. For that reason, many
analysts pay closer attention to operating earnings than net earnings.
As for whether write-offs are good or bad: Depends what's being written off. Be especially leery of
merger-related write-offs by companies that don't break down the actual charges. Companies have been
known to use write-offs as a smoke-and-mirrors attempt to make quarterly earnings look better than
they really are, while actual operations continue to sag. |
