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Impact of Discounting Future Cash Flows for Impairment

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Calculating the true impairment value of an asset involves estimating the fair value of it. As you discussed last week, estimating an accurate fair value of an asset can be particularly challenging. In many cases, companies use different techniques to determine the level of impairment of their assets, such as discounting future cash flows. While the use of these methods can be subjective and require a heightened ethical sensitivity, it provides essential information for company managers and investors.

Write a 2- to 4-page paper explaining in detail the issues of discounting and not discounting future cash flows for impairment and how that impacts the calculation of impairment as well as how this calculation impacts the balance sheet. In your response, also analyze the ethical considerations related to discounting of future cash flows for impairment. Provide your position on whether it is ethical to 'not discount' future cash flows for impairment. Be sure to support your position.

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The expert examines the impact of discounting future cash flows for impairment. The response addresses the query posted in 785 words with APA references.

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The response addresses the query posted in 785 words with APA references

//The non-current assets are carried at the historical value in the financial statements and adjusted for fair values from time to time based on the prevailing market conditions. In this context, the following discussion has explored the use of discounted cash flows in the impairment of assets.//

As per the provisions of International Accounting Standard (IAS) 36 "Impairment of assets", an organization is required to adjust the carrying amount of assets so as to ensure that the assets are carried at recoverable amount. For the purpose of calculation of the recoverable amount, fair value and value in use are required to be calculated in respect of each asset. The fair value, for this purpose, implies the value that would be fetched by selling the assets less costs incurred in selling the asset. The value in use is calculated with reference to the cash flows, which is expected to be received from the use of assets. The recoverable amount of asset is taken as the higher of fair value and the value in use.

The recoverable amount and carrying amount of the asset is compared, and if the recoverable amount is less than the carrying amount of the asset, the difference is recognized as ...

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Ashish Sharma, MBA (IP)
Education
  • MBA (IP), International Center for Internationa Business
  • BBA, University of Rajasthan
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