Quick question: If an asset is impaired, what effect will this have on ROA. The write down is a loss and will reduce NI in the current year, as well as assets. So in the current year ROA may go up or down? In subsequent years, with the lower carrying value of the asset, there is lower depreciate expense, which will increase NI, so ROA will be higher. Is this correct? Thoughts? Feelings? Comments?
Future ROA & ROE will increase, as will future net income (due to lower asset value, smaller depreciation expense). Originally the income statement will show an impairment loss in the income before tax from continuing operations. NI will be lower at this point.
NI will be lower, but so will assets. There are no definitive directions for ROE and ROA for the period of the write down?
Wouldn’t the impairment charge be equal to the decrease in assets? In that case - as long as the pre-impairment return on assets was less than one (as it typically is) - the post impairment return on assets would be lower.
Pre-impairment Return / Assets = 5 / 100 = 5% Post Impariment Return / Assets = 4 / 99 = 4.04%
The % change in assets would be larger relative to the % change in net income.
Right ratio greater than 1, equal decrease to numerator and denominator increases ratio opposite is true if ratio less than 1. That’s a good thing to remember, that came up in the cfai mock.
I find, rather then remembering the rule, I sometimes quickly jot out something along the lines of what I wrote above. For example, it’s quick to see that 1/2 is less than 2/3s, even as i decreased the numerator and denominator by the same absolute amount.