Unfortunately, some business investments do not work out as planned and they have to be written down or written off. This means the value of the asset is reduced to fair value or perhaps zero. In this case, according to generally accepted accounting principles, you must take several steps to accurately describe the change in your financial statements.
Valuation
The first thing to do when writing off an investment is to get an accurate valuation of your investment. If it is a publicly traded company or bond, then you will have a minute-by-minute update of the price that can be input into your balance sheet at the end of every quarter when you update your financial statements. If it is a non-publicly traded investment, then you have three options. If the company is bankrupt, the investment is worth zero. If there has been a recent investment by a third party, then you can use that valuation. If neither is the case, then you do an appraisal with comparable investments to obtain a fair value.
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Accounting Entries
Once you have obtained the valuation on a majority-owned investment, you must make two new entries into your financial statements, according to GAAP. First, you must enter a debit from your income statement as a provision for bad debts. This is directly reduced from you net income. Next, you must reduce the investment's value on your balance sheet by an equal amount to reflect the new valuation.
Consolidation
For investments where you own more than 50 percent of the company, you must completely consolidate the write-off on your company's financial reporting. It is treated the same way on your financial statements as your own assets and liabilities. If you only maintain a 20 to 50 percent equity stake in the company, then you are permitted to make a proforma change in your accounting, equivalent to the ownership stake. If you own less than 20 percent, you are given more leverage to value the goodwill of the investment. Consult a valuation expert for treatment on these write-offs.
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Example
In 2006, Intel invested $600 million to purchase a majority of wireless semiconductor company Clearwire. It planned to help promote the company's WiMax technology. However, after several years, the WiMax technology failed to catch on, and Intel was forced to come to the realization that its investment was no longer worth what it paid. In January 2009, the company wrote down the value of Clearwire by $950 million and took that entire amount as a loss in net income and as a reduction to its balance sheet.
