Explore BrainMass

Discounting future cash flows for impairment

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Please discuss the issues of discounting and not discounting future cash flows for impairment and how it impacts the calculation of impairment as well as how this calculation impacts the balance sheet. Additionally, are there ethical considerations related to discounting of future cash flows for impairment?

© BrainMass Inc. brainmass.com December 20, 2018, 10:43 am ad1c9bdddf

Solution Preview

In finance, a revaluation of fixed assets is a technique that may be required to accurately describe the true value of the capital goods a business owns. This should be distinguished from planned depreciation, where the recorded decline in value of an asset is tied to its age.

Fixed assets are held by an enterprise for the purpose of producing goods or rendering services, as opposed to being held for resale in the normal course of business. For example, machines, buildings, patents or licenses can be fixed assets of a business.

The purpose of a revaluation is to bring into the books the fair market value of fixed assets. This may be helpful in order to decide whether to invest in another business. If a company wants to sell one of its assets, it is revalued in preparation for sales negotiations.

1 Reasons for revaluation
2 Methods of revaluation of fixed assets
2.1 Indexation
2.2 Current market price (CMP)
2.3 Appraisal method
2.4 Selective revaluation
2.5 Preliminary considerations
3 Upward revaluation
3.1 Important points
4 Downward revaluation
5 Successive revaluations
6 See also
Reasons for revaluation

It is common to see companies revaluing their fixed assets. It is important to make the distinctions between a 'private' revaluation to a 'public' revaluation which is carried out in the financial reports. The purposes are varied:
To show the true rate of return on capital employed.

To conserve adequate funds in the business for replacement of fixed assets at the end of their useful lives. Provision for depreciation based on historic cost will show inflated profits and lead to payment of excessive dividends.
To show the fair market value of assets which have considerably appreciated since their ...

Solution Summary

Sometimes a business may need to revalue its assets based upon economic conditions. This discussion reflects the changes and factors to consider in the valuation of assets as a result of impairment, and how it affects the balance sheet, and the actual valuation of the firm. In turn, the affect on the shareholder an be derived.