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.