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Impairment reversals: unbiased reporting or earnings management

Impairment reversals: unbiased reporting or earnings management PurposeThis paper aims to provide evidence that will inform the convergence debate regarding accounting standards. The authors assess the ability of impairment reversals allowed under International Accounting Standard 36 but disallowed by the Financial Accounting Standards Board to provide useful information about a company.Design/methodology/approachThe authors use a sample of 182 Malaysian firms that reversed impairment charges and a matched sample of firms which chose not to reverse their impairments. Further analysis examines if reversing an impairment charge is associated with motivations for and evidence of earnings management.FindingsThe authors find no evidence that the reversal of an impairment charge marks a company out as managing contemporaneous earnings. However, they document evidence that firms with high levels of abnormal accruals and weak corporate governance avoid earnings decline by reversing previously recognized impairments. In addition, companies that have engaged in big baths as evidenced by high accumulated impairment balances and prior changes in top management, use impairment reversals to avoid earnings declines.Research limitations/implicationsThe results of this study support both the informative and opportunistic hypotheses of impairment reversal reporting using Financial Reporting Standard 136.Practical implicationsThe results also demonstrate how companies that use impairment reversals opportunistically can be identified.Originality/valueThe results support IASB’s approach to the reversal of impairments. They also provide novel evidence as to how companies exploit a cookie-jar reserve created by a prior big bath opportunistically. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Accounting and Information Management Emerald Publishing

Impairment reversals: unbiased reporting or earnings management

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1834-7649
DOI
10.1108/IJAIM-08-2016-0084
Publisher site
See Article on Publisher Site

Abstract

PurposeThis paper aims to provide evidence that will inform the convergence debate regarding accounting standards. The authors assess the ability of impairment reversals allowed under International Accounting Standard 36 but disallowed by the Financial Accounting Standards Board to provide useful information about a company.Design/methodology/approachThe authors use a sample of 182 Malaysian firms that reversed impairment charges and a matched sample of firms which chose not to reverse their impairments. Further analysis examines if reversing an impairment charge is associated with motivations for and evidence of earnings management.FindingsThe authors find no evidence that the reversal of an impairment charge marks a company out as managing contemporaneous earnings. However, they document evidence that firms with high levels of abnormal accruals and weak corporate governance avoid earnings decline by reversing previously recognized impairments. In addition, companies that have engaged in big baths as evidenced by high accumulated impairment balances and prior changes in top management, use impairment reversals to avoid earnings declines.Research limitations/implicationsThe results of this study support both the informative and opportunistic hypotheses of impairment reversal reporting using Financial Reporting Standard 136.Practical implicationsThe results also demonstrate how companies that use impairment reversals opportunistically can be identified.Originality/valueThe results support IASB’s approach to the reversal of impairments. They also provide novel evidence as to how companies exploit a cookie-jar reserve created by a prior big bath opportunistically.

Journal

International Journal of Accounting and Information ManagementEmerald Publishing

Published: May 8, 2018

References