How to Interpret Writedowns

When it comes to investments and derivative securities, the revaluation is more complex. In September 2006, the Financial Accounting Standards Board (FASB ) issued SFAS (statement of financial account standards) No. 157: Fair Value Measurements.

According the FASB, investments must be valued based on a number of assumptions, including risk . The issuance of SFAS-157 was made effective just as the mortgage and credit markets were beginning to deteriorate. As those problems persisted, it became apparent that the investments in mortgages, mortgage derivatives and asset-backed securities needed to be revalued in accordance with SFAS-157. Hence, a slew of investment banks and commercial banks have taken large-scale writedowns on their portfolio of mortgage and related investments during this most recent quarterly reporting season (see "Writedown Talk Whipshaws Citi").

Discounted Operation

On occasion, in the natural course of business, a company will close a division, eliminate jobs or shutter some locations. This is sometimes done as part of a bigger plan for corporate restructuring or a major strategic event.

For example, earlier this year, Darden Restaurants (DRI - Cramer's Take - Stockpickr) closed 54 Smokey Bones and two Rocky River Grillhouse locations and announced its intention to sell the remaining Smokey Bones restaurants. In addition, nine Bahama Breeze locations were closed. All of the results and impairments for the closed or held-for-sale units were categorized as discontinued operations. In the process, Darden took an impairment charge for the closings.