- This topic has 4 replies, 4 voices, and was last updated Apr-1710:51 pm by
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Up0
Hi all – have a question on impairment that I’m still thinking out aloud with. Thought I’d share it here and get some thoughts too!
Impairment is a permanent write-down in a particular asset that occurs in one particular year. So the effect on Net Income is negative, but it doesn’t affect cash flow.
Net income increases in future years because of reduced asset depreciation, and cash flow remains unchanged.
My question is, on aggregate, does the net income differences balance out (assuming no discounting)? In other words, does the loss in net income in the first year balance out all future increases in net income expected from the same impairment? If this is so, I guess on average this balances out to be a loss (as after discounting, the future increase in net income is worth less than the decrease in net income in the previous year). Hope this part is clear…
Also, what are the other large changes when impairment happens that we should keep in mind?
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Up5
I’m reading up on this today – will get back to you later @tim 🙂
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Up5
@tim I agree with @artyeasel. Impairment’s effects on net income, disregarding time effects should net out. But I’m not sure if CFAI will ever ask a question like that!
ROA and ROE will increase going forward (as your assets have decreased) as well.
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Up5
Man, you guys are quick, I only just saw this – not keeping up with my usual omnipresence! :-O
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Up1
To answer a part of your question – impairment is effectively immediate ‘forced depreciation’ of a particular asset. So yes, the net income differences does balance out assuming no discounting.
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