impairment loss: impact on income statement and cash flows

[afranks1]

This is from CFAI reading 18, question 3.
Statement says “company recognized an impairment loss of 50million. Impairment loss was reported as ‘other income’ in the income statement”.
CFAI answer says: “the impairment loss is a non-cash item and will not affect operating cash flows”.
However, since income taxes are lower due to the impairment (meaning less cash paid for taxes) isn’t the operating cash flow actually affected?

 

[ro424]

My understanding is that asset impairments are not tax deductible unless realized, and so essentially a DTA is created (also a non-cash charge).
Though i can’t seem to confirm this in the text, so any other thoughts here are welcome.

 

[Galli]

ro424 wrote:
My understanding is that asset impairments are not tax deductible unless realized, and so essentially a DTA is created (also a non-cash charge).
Though i can’t seem to confirm this in the text, so any other thoughts here are welcome.

I think it’s upon disposal of the imparied asset not realization but maybe that means the same thing?

 

[ro424]

yes

 

[cfa_mixer]

The reason CFO will not be lower is because after you get your Net Income, to get to the CFO, you need to add back all your non-cash charges which in this case would include the impairment charges.

 

[ro424]

OP’s point is that NI itself would be lower because of the offset to tax expense due to the impairment loss (reported in NI). Your point that it’s added back to CFO is correct, but if there’s a tax adjustment within NI, then you are starting from a lower NI to begin with (hence the change in CFO with an impairment loss).
I think the reason the text states there’s no impact to CFO is because there’s actually no impact on taxes because you generate a DTA and the tax benefit is only realized upon disposal of the impaired asset. But i can’t seem to confirm this within the text…

 

[S2000magician]

ro424 wrote:OP’s point is that NI itself would be lower because of the offset to tax expense due to the impairment loss (reported in NI). Your point that it’s added back to CFO is correct, but if there’s a tax adjustment within NI, then you are starting from a lower NI to begin with (hence the change in CFO with an impairment loss).
I think the reason the text states there’s no impact to CFO is because there’s actually no impact on taxes because you generate a DTA and the tax benefit is only realized upon disposal of the impaired asset. But i can’t seem to confirm this within the text…

Perhaps you’re looking in the wrong place.
Try Level I.
(You’re correct: you do not recognize the loss for tax purposes, so it creates a DTA.)