FRA question question, following, recognized, net

w1977

Hi,

following question arose:

Schweser CFA book 3 Page 331 Q15


Taking an impairment charge due to a decrease in the value of a long-lived depriciable asset is least likely, in the period the impairment is recognized, to reduce a firms:

a) net income
b) operating income
c) taxes payable

Right answer c)

In my opinion, impairment charges reduce operating and net income but also taxes payable!
When my income is reduced, I will have to pay less tax...

Schweser argues: "Taxes are not affected because any loss in asset value will reduce taxes only when the asset is disposed of and the loss is actually realized."

Can you help me out? Where am I thinking wrong?

Regards

Daniel

shootingstar

Taxes payable is the amount of money you owe to the IRS based on your tax return. For tax return purposes depreciable assets havea set life and depreciation schedules based on the category of asset. So the cash you have t pay this year is unaffected by the impairment taken for book puposes

What would change would be your deferred taxes because you're likely taking a larger charge for book purposes than you are allowed for tax return purposes

johnnyBuz

Makes sense, thanks a lot!