Key points relevant to this discussion: Impairment two ways to report a) Held for sale (these assets are not depreciated further, and the cost to sell should be deducted from the fair value of the asset. So impairment = carrying value of asset - fair value - cost of sale) b) Assets remaining in use : first do the recoverability test, then do the loss measurement. recoverability test: if carrying value > undiscounted cash flows of the asset - remember this is aggressive approach. loss measurement = carrying value of the asset - fair value Also the impairment loss is reported pretax as a component of income from continuing operations. Previous impairments can’t be restored, but there are other ways to work around, namely raising lives of assets, and salvage values. Now can someone explain the impact of impairment on financial ratios?
Impairment doesn’t lower income tax. You write it down for financial purposes --> no impact on cash flow. ROA and ROE will increase: higher numerator and lower denminator (NI will be lower in the 1st year but then relatively higher; decrease in TA). higher D/E ratio: lower denominator higher total (and fixed) asset turnover : lower denominators lower BV per share: lower numerator
gogiants Wrote: ------------------------------------------------------- > Impairment doesn’t lower income tax. You write it > down for financial purposes --> no impact on cash > flow. why is there no impact on cash flow, asset impairment lower your taxable income, so shouldn’t you get a benefit from tax that will make CFO go up?