Changes to the growth and discount rates and asset impairment

Purpose - With timeliness and measurement of asset impairments as well as management opportunistic behaviour being topical, since the issuance of Australian Accounting Standards Board (AASB) 136, this study aims to examine whether assumptions about growth and discount rates made about asset recoverable amounts determine asset impairments. Design/methodology/approach - This study uses a sample of 450 firm-year observations representing 133 Australian listed firms from 2015 to 2018. An estimation model is used where asset impairments is the dependent variable, growth and discount rates are the variables of interest and several impairment indicators are included as controls. Findings - The results show that the decrease in growth rate but not the increase in discount rate affects the recognition of large asset impairments, where firms decrease the growth rate in the year of recognition. A change in discount rate affects asset impairments only when it is higher than the industry average. Hence, the growth rate is the management’s tool of choice in the recognition of asset impairments. Originality/value - This study provides additional insight into how AASB 136 is used in practice. This includes investigating the tools used by firms in the calculation of asset recoverable amount and whether firms provide important information, as a part of disclosure. The results are of interest to investors and policymakers because they highlight the need for more restrictions around growth rate assumptions and less variation in disclosure.