- Capitalizing Vs. Expensing Costs
- Financial Reporting of Intangible Assets
- Depreciation Methods for Property, Plant, and Equipment (PPE)
- Impact of Depreciation Methods on Financial Statements
- Depreciation – Important Points
- Amortization of Intangible Assets
- Revaluation Model for Fixed Assets
- Impairment of Long-lived Assets
- Impact of Asset Impairment
- Derecognition of PPE and Intangible Assets
- Disclosures Related to PPE and Intangible Assets
- Financial Reporting of Investment Property Vs. PPE
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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