Also, I understand what you are saying. I just think it is a misinterpretation of the spirit of the questions. IIRC, there may be a little ambiguity to some of the LI questions on the test, so getting at the spirit may be necessary. So the question states “asset is written down…” and “the effect on the firm’s financial statements…” I think the only way to interpret this is “impairing the asset CAUSES what?” While it is true that equity will be higher in subsequent periods (assuming the firm is profitable and retains some earnings), the asset impairment does not cause this. The asset impairment causes lower depreciation expense which causes higher profitability. EDIT: I was writing this before I saw your previous post, so I was still talking about what we were discussing above. I get what you are saying in the previous post.
Aside from what Stalla says about deferred taxes, I think I see the point now, enlightened by the comment above. The key idea is that profits are non cumulative, period over period, while equity is. So, first year profit will fall, but on subsequemt periods we start with a clean slate, and profits will be higher since we subtract less depreciation every year thereon. However, equity got lower in the first period, and we have just dug ourselves a hole that we have to grow out of over time. Is this a good way of putting it?
Can impairment go lower than BV? If so, even if one year of depreciation is left, you still could get hit.
Dreary - No, cant impair it past Book Value. The idea here is that depreciation is really a way to recognize the benefit of the asset, over its life. When you impair the asset you are just speeding up that depreciation to the current period (essentially). But in no case can you impair or depreciate an asset for more than remaining Book Value. Look at I_sucks post above as that is a good way to put the purpose of the question (which I misinterpreted). But it seems you have the concept down.