Can someone please explain question # 18 pg 379 of FRA book (Evaluating Financial Reporting quality). The explanation states that a write-down is an indication that deprication was too low in prior years. How is that possible? An asset with a higher book value cannot have a lower dep. expense.
Essentially this means that depreciation expense in prior years was not sufficient enough to reduce the carrying value of the asset to its proper level, therefore an impairment was taken in order to reduce the asset value appropriately. This could be a way of managing earnings (e.g. take low DE in low earnings years, and high impairment in high earnings years).
This can be fairly common when a company uses straight-line depreciation: usually an asset loses the greatest portion of its value in the early years. Thus, as ro424 says, the company may write down the asset so that its carrying value better reflects its market value.
Thanks for the clarification guys!
My pleasure.