"which then shows up as an EXPENSE item, therefore a REDUCTION IN CASH. " No chance. The most likely thing to get impaired is goodwill which has no cash component at all. It’s a non-cash charge.
JDV Is it only Goodwill that can get impaired? What about a physical asset? They talk about future cash flows from the asset being less that the carrying value of the asset… so I think of for example a lathe or some such equipment, which was purchased on the books at say 100K, and they depreciate the equipment for 10 years, straight line. at the end of the fourth year - carrying value = 60K but the future value of cash flows from the asset is < 60K. say 50K. So technically an Asset impairment obligation of 10K would show up… wouldn’t it? and how would this show up on the books? and what would be its impact on the financial statements? CP
The “best” answer is B. A is wrong. An impairement is basically an acceleration of depreciation/amortization for book purposes. It has no effect on cash flow becuase it is a non-cash item. It also will likely not effect allowable tax depreciation/amortizationso there is no tax-linked cash flow. C is wrong because if you write theasset down this year there is less to depreciate in future years. D is wrong becuase even tho your income in future periods might be higher, equity is a cumulative figure and cumulatively more expenses (impairment + depreciation) will have been recorded, reducing equity. The only reason I say B is the “best” and not the correct answer is that if we’re talking about an impairment of a non-amortizeable asset like goodwill, there is no effect on future income statements. The question really should read “A depreciable asset is written down…”
Guys, I am not quite sure about this since i have not even reached this yet - just started reviewing the material, been reading through articles and I personally would go for A again. If we view the answes again: a. Lower pretax cash flow b. Higher profitability. c. Higher depreciation expense. d. Higher shareholders’ equity. According to Investopidea the affects on the firms financial statment for the subsequent year will be: Assets Impairment - Effects on Financial Statements and Ratios Past income statements are not restated. The current income statement will include an impairment loss in income before tax from continuing operations. Net income will also be lower. On the balance sheet, long-term assets are reduced by the impairment. A deferred-tax asset is created (if there was a deferred tax liability it is reduced). Stockholders’ equity is reduced as a result of the impairment loss included in the income statement. Current and future fixed-asset turnover will increase (lower fixed assets). Since stockholders’ equity will be lower, debt-to-equity will be lower. Debt-to-assets will be higher. Cash flow based ratios will remain unaffected (no cash implications). Future net income will be higher as there will be lower asset value, and thus a smaller depreciation expense. Future ROA and ROE will increase. Past ratios that evaluated fixed assets and depreciation policy are distorted by impairment write-downs. What do you guys think?
B. During the year of write-down, it affects both the balance sheet and the income statement. Even during the year of write-down, it shouldn’t affect the cashflow because, write-downs are non-cash expenses. So write downs should not have an impact in the cash flow in the current year or in subsequent years.
ahmedrahma, You offer A as an answer, and then quote something that doesn’t support it. Four lines above the “What do you think” it says (no cash implications). My answer above was not intended as a guess or an opinion. It was meant as “here’s the answer and explanation, read it and move on”
… way to go Super I.
cpk123 Wrote: ------------------------------------------------------- > JDV > > Is it only Goodwill that can get impaired? What > about a physical asset? They talk about future > cash flows from the asset being less that the > carrying value of the asset… > No all kinds of things can get impaired and, in fact, the goodwill thing is sort-of irrelevant to this question (which of course begs the question of why I brought it up) because for some reason that still escapes me goodwill lasts forever. On this question, you should think “Oh they have been drag racnig the bulldozer so it is impaired”. . > so I think of for example a lathe or some such > equipment, which was purchased on the books at say > 100K, and they depreciate the equipment for 10 > years, straight line. > > at the end of the fourth year - carrying value = > 60K > but the future value of cash flows from the asset > is < 60K. say 50K. > > So technically an Asset impairment obligation of > 10K would show up… wouldn’t it? > So they would still have the same cash flows in upcoming years that are independent of how the account for things now. They planned on taking a non-cash charge of 60K in the future but now are only taking 50k worth of charges in the future. That means they will have higher earnings in the future (ceteris paribus, auld lang syne, etc). > and how would this show up on the books? and what > would be its impact on the financial statements? > > CP Edit: Oh yeah, and all that stuff Super I said better than me anyway that I just read after my post.
Still no comment as i still dont get the subject very well… need to reach there first Thank you guys for your explanation - brilliant- hope the originator of this message (Dreary) is clear now Good luck buddies