Impact of Asset Impairment
In the previous article we learned about the Impairment of Long-lived Assets. Let’s now look at the impact of asset impairment.
In the initial period following an asset impairment, a firm’s:
- Asset turnover ratios will rise because the asset base is lower.
- Debt-to-Equity ratio will rise because the impairment has lowered the value of equity.
- Profit margins will show a one-time dip due to the write-down expense (assuming all needed write-downs have taken place).
- Book value of equity will drop.
In the future accounting periods, after the asset impairment has been recognized, a firm’s:
- Future depreciation expense will decline because the book value of the depreciable asset base is now lower.
- Future profitability should rise because depreciation expense is lower.
- Return on Assets (ROA) and Return on Equity (ROE) should rise because the firm is more profitable and has a lower asset base.
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- CFA Level 2: Financial Reporting Part 1 - Introduction
- Financial Reporting: Important Definitions
- FIFO and LIFO Methods for Inventory Expensing
- Inventory Accounting and Financial Statements
- Inflation/Deflation and Inventory Accounting Analysis
- LIFO – Tax and Cash Flow Note
- LIFO Reserve and Converting LIFO Net Income to FIFO Net Income
- LIFO Liquidation
- Inventory at Net Realizable Value
- Impacts of LIFO and FIFO Inventory Methods on Selected Financial Ratios
- Accounting of Long-lived Assets - Expensing vs. Capitalizing
- Depreciation Methods for Property, Plant, and Equipment (PPE)
- Impact of Depreciation Method
- Depreciation - Important Points
- Impairment of Long-lived Assets
- Impact of Asset Impairment
- Revaluation of Property, Plant, & Equipment (PPE)
- Leasing versus Purchasing Assets
- Traditional Lessee Accounting in US GAAP
- Effects of Leases on Selected Financial Reporting Items for Lessees
- Lessor Accounting for Leases
- Lessors and Sales-Type Capital Leases
- Lessors and Direct Financing Capital Leases
- Effect of Leases on Financial Statements for Lessors
- Future of Lease Accounting
- CFA Level 2: Financial Reporting 1 - Recommendations