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Discounting and the Treatment of Taxes in Impairment Reviews

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  • Erlend Kvaal

Abstract

IAS 36 requires an asset's recoverable amount to be measured by discounting its pre‐tax rather than post‐tax cash flows. Although defined so as to produce the same value, the pre‐tax approach is claimed to be simpler and more reliable. The paper demonstrates that an appropriate pre‐tax discount rate varies between assets with different tax depreciation schedules and that it changes over time. Hence, pre‐tax discounting is likely to become complex. The paper advocates an amendment of the standard such that value in use is measured by company‐specific after‐tax cash flows, and such that deferred taxes are included in the impairment review.

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  • Erlend Kvaal, 2007. "Discounting and the Treatment of Taxes in Impairment Reviews," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(5‐6), pages 767-791, June.
    • Handle: RePEc:bla:jbfnac:v:34:y:2007:i:5-6:p:767-791
    DOI: 10.1111/j.1468-5957.2007.02015.x
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    References listed on IDEAS

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    1. Eli Amir & Theodore Sougiannis, 1999. "Analysts' Interpretation and Investors' Valuation of Tax Carryforwards," Contemporary Accounting Research, John Wiley & Sons, vol. 16(1), pages 1-33, March.
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    4. Mark P. Bauman & Somnath Das, 2004. "Stock Market Valuation of Deferred Tax Assets: Evidence from Internet Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(9-10), pages 1223-1260.
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    6. David B. Citron, 2001. "The Valuation of Deferred Taxation: Evidence from the UK Partial Provision Approach," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(7‐8), pages 821-852, September.
    7. Mark P. Bauman & Somnath Das, 2004. "Stock Market Valuation of Deferred Tax Assets: Evidence from Internet Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(9‐10), pages 1223-1260, November.
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    Cited by:

    1. Tadeusz Dudycz & Jadwiga Praźników, 2020. "Does the Mark-to-Model Fair Value Measure Make Assets Impairment Noisy?: A Literature Review," Sustainability, MDPI, vol. 12(4), pages 1-24, February.
    2. Andreas Schüler, 2020. "Zur kapitalwertorientierten Bewertung (nicht nur) von immateriellen Vermögenswerten in der internationalen Rechnungslegung [On the Income-Approach (Not Only) to Value Intangible Assets According to," Schmalenbach Journal of Business Research, Springer, vol. 72(3), pages 371-396, September.
    3. Erlend Kvaal, 2018. "Discussion of ‘Making Deferred Taxes Relevant’," Accounting in Europe, Taylor & Francis Journals, vol. 15(2), pages 231-241, May.
    4. Dominic Detzen & Tobias Stork genannt Wersborg & Henning Zülch, 2016. "Impairment of Goodwill and Deferred Taxes Under IFRS," Australian Accounting Review, CPA Australia, vol. 26(3), pages 301-311, September.

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