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Discounting and the Treatment of Taxes in Impairment Reviews
Author(s) -
Kvaal Erlend
Publication year - 2007
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2007.02015.x
Subject(s) - depreciation (economics) , economics , discounting , deferred tax , tax basis , monetary economics , cash flow , tax credit , value (mathematics) , present value , asset (computer security) , microeconomics , tax reform , actuarial science , public economics , state income tax , finance , mathematics , computer science , profit (economics) , statistics , computer security , financial capital , gross income , capital formation
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.