Optimal impairment rules
AbstractWe study the optimal accounting policy of a financially constrained firm that pledges assets to raise debt capital for financing a risky project. The accounting system provides information about the value of the collateral. Absent accounting regulation, the optimal accounting system is conditionally conservative: it recognizes an impairment loss if the asset value is below a certain threshold, but never reports unrealized gains. We describe the optimal impairment rule and the optimal precision of the accounting information, and we provide comparative static results that lead to testable predictions on the determinants of impairment rules.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Accounting and Economics.
Volume (Year): 48 (2009)
Issue (Month): 1 (October)
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Web page: http://www.elsevier.com/locate/jae
Conservatism Impairment Debt contracting Asset measurement;
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