CFA Practice Question
Which of the following statements concerning impairment of assets is INCORRECT?
A. An asset is said to be impaired if the sum its future expected cash flows is less than its carrying value.
B. Writedown of an impaired asset equals its carrying cost less fair value.
C. Present value of future cash flows is computed at the company's cost of capital for purposes of impairment.
Explanation: Future cash flows are discounted at the incremental cost of debt, not cost of capital.
User Contributed Comments 7
| User | Comment |
|---|---|
| melmilesxx | i think b is correct because its the difference between your book value and the market value - which equals the amount of gain/loss on the asset. |
| Carol1 | B is partially correct: Impairment Loss = Book Value - Either Fair Value or Present Value of Future Cash Flows But C is wrong. |
| jpducros | Why don't we discount future cash flows at the WACC instead of Cost of debt ? |
| ninad123 | the rule says that discount rate should be equal to current market of cost of borrowed money you will use to buy similar asset :( I got this wrong too... |
| Friso | This doesn't make economic sense to me. It sounds more logical you would like to maintain your capital structure and thus borrow at the WACC, not the Cost of Debt alone. |
| Straive | Isn't A wrong as it does not discount the future cash flows? |
| GBolt93 | When testing for impairment you use undiscounted cash flows. If it's found to be impaired then you make the adjustment using PV of discounted cash flows or fair value. |