I’m a little confused about the net effect of an impairment charge on cash-flow. My understanding is that if a company takes an impairment charge, in the short-run net income will be reduced due to treating the impairment as a loss. Thus, in the short-run income tax will be decreased as a result of this decrease in net income and net cash-flow reduced . Then, in the long run depreciation will be reduced because the asset has been written down, and thus net income will increase which will increase income tax and thus reduce net cash flow. Is this correct or am I confused about the tax effects of an impairment?
It all comes down to one question. Is the impairment charge deductible for tax purposes in the current year (or on some timetable that differs from its pre-impairment schedule) ? If the answer is yes, then it has a cash flow effect, if not there is no effect. Usually you would need specific info to make this determination.