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Title: An examination of the effects of IAS-36 asset impairments in Europe
Author: Ala, Alessandro
Awarding Body: Durham University
Current Institution: Durham University
Date of Award: 2013
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This thesis aims to address four research questions related to the effects of IAS-36 adoption in Europe: firstly, whether the adoption of IAS-36 impairment rules, per se, improved management’s practice of asset appraisal and impairment reporting; secondly, whether earnings management, generated through the reporting of IAS-36 impairment losses and concurrent discretional accruals, is fairly used in order to genuinely convey additional trustworthy information about management’s negative expectations of persistent decline in future firm performance (informative earnings management), or cunningly abused to artificially boost the future operating and stock performance of the firm (opportunistic earnings management); thirdly, whether investors are able (or not able) to discriminate between informative and opportunistic earnings management, and the market attributes (or does not attribute) to the content of such earnings management the appropriate value relevance for the determination of firms’ stock returns; and fourthly, whether the adoption of supra-national IAS-36 impairment rules enhanced the harmonization of management’s practice of impairment reporting across European countries. This thesis examines, firstly, the regulatory aspects of IAS-36 in order to identify methodological aspects and interpretational issues, unaddressed by the IASB, which management might use to put into practice alternative accounting policies. The analysis shows that methodological and interpretative flexibility relates firstly to the regulations for the determination of the appropriate dimension of a cash generating unit (CGU) for non-standalone assets such as goodwill; secondly, to the rules for the identification of a proper discount rate for the estimate of the discounted cash flow for the computation of the assets’ value in use (VIU); thirdly, to the procedure for the calculation of the value in use of a CGU, when it includes an essential standalone asset which can be individually evaluated; and fourthly, to the alternative options for the allocation of common assets, such as goodwill and other non-financial intangible assets, either to many CGUs or to a new CGU of superior level. Qualitative evidence shows that, in these cases, the discretion allowed by IAS-36 enables management to put in practice alternative accounting policies suitable to either conceal asset impairments or to drive their overall value, and hence the correlated earnings sum, towards the desired amount. Additionally, focusing on a wide sample of 3,720 firms and 47,651 firm-year observations from 16 European countries, this thesis undertakes an extensive empirical study of the effect of IAS-36 on quality and harmonization of management's practice of impairment reporting, by contrasting the determinants of their asset impairments’ decisions (likelihood and magnitude of the reported impairments), namely economic factors, managerial incentives and disincentives, and country-specific factors, before and after the adoption of IAS-36. Empirical findings reveal a weaker association between asset impairments, of either goodwill, or other intangible, or tangible assets, with economic factors after the adoption of IAS-36. Furthermore, the results indicate that after the adoption of IAS-36 managerial reporting incentives and disincentives play a lower role in explaining tangible asset impairments, but play a substantially larger role in explaining discretional asset impairments such as goodwill or other intangible asset impairments. In addition, the results show a weaker association between asset impairments and country-specific factors after the adoption of IAS-36. Finally, focusing on a sample of 4,192 IAS-36 asset-impairment observations from 16 European countries, this thesis carries out an empirical study of the informative content of impairment-based and accrual-based earnings management, by analysing the pattern of discretional accruals reported concurrently and subsequently to IAS-36 asset impairments and the corresponding pattern of firms’ operating and stock performance. In addition, this empirical study examines the association of write-down charges and concurrent discretional accruals with stock market returns. Results show that firms use earnings management differently in different circumstances. In particular, firms which report multiple impairments, use their discretion at the time of the initial asset impairments with the aim of fairly disclosing an actual permanent reduction of those assets’ ability to contribute to their business’s value (informative earnings management). In contrast, firms which report single impairments, use their discretion at the time of initial asset write-offs, with the objective of artificially boosting their future operating and stock performance (opportunistic earnings management). Furthermore, with reference to single impairments, findings give evidence that opportunistic earnings management can be circumscribed to goodwill and other intangible impairments, whose rules allow space for subjectivity and arbitrary choices. Additionally, results show that investors are unable to fully discriminate between informative and opportunistic earnings management at the moment of initial asset impairments. Therefore, they are particularly cautious towards those asset categories which are more susceptible of being abused for opportunistic reasons, such as goodwill and other intangibles, at that time, when the information asymmetry is higher. Consistently, they are more reliant on those asset categories which are less likely to be abused, such as PPE and subsequent asset impairments in general. These results hold, when moving from low to high levels of auditing quality and from low to high levels of security law quality and enforcement, confirming that management’s practice of IAS-36 impairment reporting and discretional accruals is not driven by country-specific factors. Overall, empirical evidence supports the view that the adoption of IAS-36 has increased the harmonization of impairment reporting practice across European countries; however such harmonization has consisted in levelling the quality of impairment reporting practice towards a lower level, rather than in increasing it to a higher standard.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available