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The Effect of Reversibility on a Manager's Decision to Record Asset Impairments

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  • Kim Trottier

Abstract

Over time, accounting standards have moved toward presenting more items at fair value on the balance sheet. Consistent with this trend, IAS No. 36 permits an impairment loss on a long‐lived asset to be reversed if the economic value of the asset recovers. This article uses empirical data from an experiment conducted with 118 managers to explore the implication of allowing impairment reversals on a manager's decision to record the loss. Results suggest that permitting reversals significantly increases the likelihood that a manager will record the impairment, especially if the manager has a bonus plan. The bonus plan effect is not caused by the manager's intention to smooth income through impairment reversals, but by his disutility from a bonus forgone if the value of the asset recovers but accounting rules prohibit him from reversing the loss. Résumé Au fil du temps, les normes comptables ont peu à peu préconisé la présentation d'un plus grand nombre d'éléments à la juste valeur au bilan. Dans le même ordre d'idée, l'IAS n˚ 36 permet la reprise de la perte de valeur d'un actif à long terme lorsque la valeur économique de l'actif en question se rétablit. L'auteure utilise des données empiriques tirées d'une expérience menée auprès de 118 gestionnaires pour étudier l'incidence de la possibilité de reprise des pertes de valeur sur la décision des gestionnaires de déprécier les actifs. Les résultats obtenus semblent indiquer que cette possibilité accroît sensiblement la probabilité qu'un gestionnaire déprécie un actif, en particulier si ledit gestionnaire bénéficie d'un régime de primes. L'effet du régime découle non pas de l'intention du gestionnaire de niveler les résultats au moyen de reprises de pertes de valeur, mais de la désutilité pour lui de renoncer à la prime si la valeur de l'actif se rétablit mais que les règles comptables lui interdisent toute reprise de la perte de valeur.

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  • Kim Trottier, 2013. "The Effect of Reversibility on a Manager's Decision to Record Asset Impairments," Accounting Perspectives, John Wiley & Sons, vol. 12(1), pages 1-22, March.
    • Handle: RePEc:wly:accper:v:12:y:2013:i:1:p:1-22
    DOI: 10.1111/1911-3838.12005
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    1. Tadeusz Dudycz & Jadwiga Praźników, 2020. "Does the Mark-to-Model Fair Value Measure Make Assets Impairment Noisy?: A Literature Review," Sustainability, MDPI, vol. 12(4), pages 1-24, February.
    2. Hong, Philip K. & Paik, Daniel Gyung & Smith, Joyce Van Der Laan, 2018. "A study of long-lived asset impairment under U.S. GAAP and IFRS within the U.S. institutional environment," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 31(C), pages 74-89.
    3. Libby, Robert & Rennekamp, Kristina M. & Seybert, Nicholas, 2015. "Regulation and the interdependent roles of managers, auditors, and directors in earnings management and accounting choice," Accounting, Organizations and Society, Elsevier, vol. 47(C), pages 25-42.
    4. Johannes Thesing & Patrick Velte, 2021. "Do fair value measurements affect accounting-based earnings quality? A literature review with a focus on corporate governance as moderator," Journal of Business Economics, Springer, vol. 91(7), pages 965-1004, September.

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