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Sometimes known as a write down, a non-cash charge is a type of accounting procedure that allows a business to charge off a certain amount against the earnings generated by the operation, without requiring that the business spend cash in order to justify the entry in the accounting records. There are several different types of charges that fall into this category, including the depreciation that is experienced on certain assets held by the business. The purpose of the non-cash charge is to adjust the value of certain non-cash assets to comply with some event that has taken place, such as a change in tax laws or even the obsolescence of equipment used in the production process.
The use of a non-cash charge is associated with changes in the value of non-cash assets, such as equipment used in the operation of the business. The charge may have to do with claiming depreciation on that equipment as it ages, allowing the business to adjust the worth and claim some sort of offset of the revenue that is coming into the business as the result of the production effort. Should advances in technology require the company to replace older machinery in order to remain competitive, those older machines may be declared obsolete. When this is the case, the non-cash charge can be used to remove the value of those older machines from the records of the company.
There are other situations in which a non-cash charge may be appropriate. For example, changes in tax laws may merit executing a write down on one or more non-cash assets owned by the company. The nature of the changes could involve application of some sort of depreciation in order to take advantage of those new laws. There are also instance in which rulings on the ownership of intellectual property may lead to applying some sort of non-cash charge to one or more assets.
Since the application of a non-cash charge has the effect of reducing the earnings for a given period, the use of this type of accounting strategy should be used prudently. Depending on the reasons for the charge, the end result could mean lower dividends to investors and could possibly have an adverse effect on the current market value of the shares of stock issued by the business. While there are situations in which a non-cash charge is helpful, care should be taken to project the outcome of applying the charge and decide if the benefits received are sufficient to offset any negative consequences that may arise.
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