Impact of Discounting Future Cash Flows for Impairment Calculating the true impa

Question

Impact of Discounting Future Cash Flows for Impairment

Calculating the true impairment value of an asset involves estimating the fair value of it. 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.

Explain 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. 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; support your position.

Explanation / Answer

The issue of discounting is generally the discount rate is based on cost of equity and debt and it changes as years passes on and once the asset is discounted using a discount rate it can not be changed back going forward in balance sheet.

If we do not discount it will not give correct picture of the asset value in balance sheet which can be misleading.

It is ethical to not to discount but it is mandatory to discount the cash flow for calcualting the present value of assrt and then imapir if necessary.

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