Discounting and the Treatment of Taxes in Impairment Reviews

Erlend Kvaal

Journal of Business Finance & Accounting, 2007, vol. 34, issue 5‐6, 767-791

Abstract: 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.

Date: 2007
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