From the course: Accounting Foundations: Asset Impairment
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A big bath: Strategic reporting of impairment losses
From the course: Accounting Foundations: Asset Impairment
A big bath: Strategic reporting of impairment losses
- Suppose it's been a tough year for your business. You know you're going to report a loss for this year, and you have some uncertainty about a few events that might make next year look not so good. Well, if you could move those not-so-good events from next year to this year, since this year's already going to be bad news, then next year might look brighter. In other words, since this year is already bad, why not pile on? This is called a big bath. The idea behind a big bath is that if a company expects to have a series of hits to net income in future years, it's better to try and recognize all the bad news in one year, leaving future years unencumbered by continuing losses. Now, one way to execute a big bath is through one large impairment loss this year, rather than recording a series of smaller, incremental impairment losses each year for the next few years. Let's say that I have several operating divisions, each…
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