Impairment of Assets: Analysis of Financial Reporting and Stock Prices

This report delves into the concept of asset impairment, examining its impact on financial statements and stock prices. The analysis begins by defining impairment charges and their direct effects on a company's net income, as reported on the income statement. It then explores how these charges influence the balance sheet by reducing the carrying values of assets to their fair value. The report further investigates the potential effects of impairment charges on stock prices, considering various conditions and contract positions. While acknowledging that impairment charges are often non-cash events with no direct impact on stock prices, it highlights that significant changes in cash flow, earnings, and leverage could affect the valuation of an organization. Furthermore, the report addresses the potential implications of financial loss or negative net income due to impairment, particularly when debt obligations are high and revenue is low. The report concludes by emphasizing the potential for asset impairments to be a concern for shareholders, particularly in the context of foreign operations and contract operations. The report references several academic papers to support its findings.

Running head: IMPAIRMENT OF ASSETS
Impairment of Assets
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1IMPAIRMENT OF ASSETS
Table of Contents
Answer to Question 1:.....................................................................................................................2
Answer to Question 2:.....................................................................................................................2
Answer to Question 3:.....................................................................................................................3
References:......................................................................................................................................4

2IMPAIRMENT OF ASSETS
Answer to Question 1:
Impairment charges take place at the time an organisation writes off products writes off
assets or products that are deemed to be damaged and hence, the impact would be directly on the
corporate net income. The impact of impairment charges would be on two financial statements.
The charges would be reported on the income statement in the same part, in which other
operating income and expenses are recorded. Impairment charges would minimise the profit of
the organisation; however, there would not be any impact on cash balance. Moreover, the
carrying values of the assets would be written down, which are reported on the balance sheet
statement to the calculated fair value. In other words, the current carrying values would be
minimised by the impairment charges (André, Dionysiou and Tsalavoutas 2018). With the
passage of time, the amount of depreciation would be adjusted per year, as previous depreciation
was dependent on the past carrying values of the assets.
Answer to Question 2:
The impairment charges could affect the stock prices of an organisation in various
conditions and contract position is one of them. The net profit would fall drastically, as the
organisation might have minimised its value of foreign assets in UK and Hong Kong in its books
of accounts. The write-off, often considered as impairment charge, is deemed to be a non-cash
event, which has no direct effect on the finances of the organisation concerned. Therefore, no
impact could be observed in the stock prices of the organisation. However, if there are material
changes in cash flow, earnings and leverage, the effect of impairment on the valuation of an
organisation might be negligible (Picker et al. 2016). There is absence of any reliable method for
anticipating the share movement after an organisation decides in undertaking an impairment hit.

3IMPAIRMENT OF ASSETS
Despite all these facts, the impairment charge might have impact on some ratios used in the
valuation of organisation and thus, it determines the way through which the market perceives the
concerned organisations. Therefore, it could be stated that the shareholders might be concerned
about the asset impairments of the foreign operations because of the contract operations of the
concerned organisation (Linnenluecke et al. 2015).
Answer to Question 3:
It is possible for any business organisation to have financial loss or negative net income,
if the debt obligations of the organisation are higher and revenue generated is lower than the
operating expenses. As stated by Detzen, Wersborg and Zülch (2015), loss of money is not
considered to be a favourable sign for the organisation. This is because net loss might cause the
investors and shareholders in pulling leftover funds from the business so that loss could be
mitigated. This would plummet the stock price of the organisation and as a result, the total
business value might decline. Therefore, the return to the shareholders might not be viable.

4IMPAIRMENT OF ASSETS
References:
André, Paul, Dionysia Dionysiou, and Ioannis Tsalavoutas. "Mandated disclosures under IAS 36
Impairment of Assets and IAS 38 Intangible Assets: value relevance and impact on analysts’
forecasts." Applied Economics 50, no. 7 (2018): 707-725.
Detzen, Dominic, Tobias Stork Genannt Wersborg, and Henning Zülch. "Bleak Weather for Sun-
Shine AG: A Case Study of Impairment of Assets." Issues in Accounting Education 30, no. 2
(2015): 18-39.
Linnenluecke, Martina K., Jac Birt, John Lyon, and Baljit K. Sidhu. "Planetary boundaries:
implications for asset impairment." Accounting & Finance 55, no. 4 (2015): 911-929.
Picker, Ruth, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, and Leo Van
Der Tas. Applying IFRS Standards. John Wiley & Sons, 2016.