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My question was inspired by this article. Relevant quotes below:

Fidelity, the only fund manager to have invested in the four-year-old company [Snapchat] best known for disappearing photos, wrote down the value of its stake by 25 per cent in the third quarter, according to data from investment research firm Morningstar.

In this example, if Fidelity had actually sold their stake for 25% less than they paid for it, that would be a loss that could be written off against taxes (hence the term "write-off"). But they're still holding on to it. So two questions:

  1. What does writing down the valuation here imply? What does it mean to Fidelity and Snapchat in real terms, given that no trading is going on?
  2. What happens if this holding actually rises in valuation later? And what if they sell it later? What basis are profits (or losses) calculated on?
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    For the close voter, I'd argue that the official definition of "on-topic" is too narrow. My opinion is some knowledge of corporate finance and its jargon is merely an advanced level of financial literacy, which is one of the goals of this SE. It appears the community has felt this way in the past too, since other questions about corporate finance have been answered. I'm also happy to rephrase this question in more general terms; I just want to know what a write-down is and why it's important. The Snapchat story was what prompted the question and is a nice example. – Jay Nov 10 '15 at 19:32
  • investopedia.com/terms/w/writedown.asp explains the concept fairly well. – JB King Nov 10 '15 at 19:44
  • @JBKing thanks but that has only a partial answer to my first question (what it implies, but not "why can it be done in the absence of trading?") and no answers to the second one (what happens if the value rises later and it's sold?) – Jay Nov 10 '15 at 19:59
  • The value of private stock is likely updated every quarter and when sold there is a calculation against the cost basis which is what the company paid for the stock similar to investors. – JB King Nov 10 '15 at 20:11
  • The link is behind a paywall – user662852 Nov 11 '15 at 20:56
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Writing off an asset means saying that you assume its value is zero or close to that. For bookkeeping purposes, you're saying you don't think you'll ever get that money back, directly or indirectly. The company collapsed, the project fizzled out, the crop failed...

Writing down an asset means reducing your estimate of its value, but not to zero. You think there is at least some chance the investment will pay off, or at least will have enough assets/ value to cover part of what you paid for it, and this number is your current best guess of what it's actually worth so that can be reported accurately as part of your own net worth.

Same idea, just different degrees.

  • Thanks. This doesn't answer my second question, and part of the first one. If no transactions are actually taking place, how can a loss be recorded? And if, in the future, a profit actually is made off the asset how is profit and tax liability recorded? Are back taxes owed? – Jay Nov 10 '15 at 19:58
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    The loss is recorded the same way depreciation and other paper losses are recorded. There aren't taxes involved and nothing was bought or sold but merely reassessed. If you buy a house and it gets adjusted in value that could change your net worth but it doesn't mean you owe capital gains taxes on the fluctuation. – JB King Nov 10 '15 at 20:13

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