In a restructuring it is possible that managers may use the opportunity to write down assets that do not even relate directly to the restructuring action. Why might a manager decide to write down an asset that is not included in the restructuring action?

Question

BlackTom AI · Accepted Answer

In this question, we’re exploring why a manager might impair an asset not directly tied to the restructuring action.
Option 1: 'Normally the stock market reacts positively to restructuring and the greater the amount the better.' This option discusses market reactions to restructuring rather than a specific accounting motive to write down an unrelated asset. It doesn’t address the accounting rationale or consequences of an asset write-down, so it’s not a precise answer to why a manager would do it.
Option 2: 'The write down relieves future periods of depreciation expense, which increases cash flows.' A write-down is a non-cash accounting event; it reduces the asset’s carrying amount but does not create cash inflows. While future depreciation expense may be lower after a write-down, this does not increase cash flows. The statement conflates non-cash accounting effects with actual cash benefits, making it incorrect.
Option 3: 'The manager is practicing conservatism.' Conservatism in accounting leads to recognizing losses or impairments when assets are overvalued, to avoid overstating assets and income. Writing down an asset, even if not part of the restructuring, can be consistent with conservatism, as it acknowledges a reduced recoverable amount.
Option 4: 'The write down relieves future periods of depreciation expense, which increases earnings.' By reducing the asset’s carrying amount, future depreciation expense may decline, potentially boosting future earnings. This describes a valid financial impact of an impairment write-down and explains why a manager might undertake such an action, even for an asset not directly tied to the restructuring.
Each option has been weighed for its alignment with standard accounting reasoning. The mismatch in cash-flow effects in option 2, and the broader (and more directly relevant) rationale in option 4, help distinguish the most fitting answer. The conservatism rationale in option 3 is plausible in general, but it does not directly explain the specific financial consequence described in option 4 as the primary motive for writing down an unrelated asset.

BU.210.650.52.FA24 Practice Quiz II

In a restructuring it is possible that managers may use the opportunity to write down assets that do not even relate directly to the restructuring action. Why might a manager decide to write down an asset that is not included in the restructuring action?

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