臺大管理論叢 NTU Management Review VOL.29 NO.1

203 NTU Management Review Vol. 29 No. 1 Apr. 2019 CKSS model), 2 this study suggests that the recognition of asset impairment will reveal distinctive earnings informativeness for current and future earnings, i.e., the informativeness of current earnings (future earnings) is decreased (increased) when firms recognize impairment of long-lived assets. Consistent with IAS No. 36, the Statement of Financial Accounting Standards No. 35 in Taiwan (hereafter, SFAS No. 35) permits an impairment of a long-lived asset to be reversed if its economic value recovers, thus bringing these items closer to their current values. Previous studies (e.g., Duh, Lee, and Lin, 2009; Zhang, Lu, and Ye, 2010) revealed that managerial manipulations are even more evident with reversible impairment standards, because they provide reporting flexibility through the timing of recognition of gains as well as losses. This suggests that managers may manipulate the timing of recognizing an asset as impaired and its subsequent reversal to achieve some future reporting objective, and thus reducing the informativeness of future earnings. However, Trottier (2013) argues that IAS No. 36 allows impairment reversals to provide more accurate and timely loss reporting. He documents that allowing the reversal of impairments both improves representational faithfulness in situations where an asset has recovered its value and improves reporting by increasing the likelihood that managers will record existing impairments in the first place. Thus, the effect of asset impairment reversals on earnings informativeness is unclear and calls for further examination. Data on impairment reversal in Taiwan provides a unique opportunity to examine this issue. Empirical results confirm our conjectures: the informativeness of current earnings decreases, yet that of future earnings increases in firms with a large magnitude of assets recognized as impaired. We also find that the increased informativeness of future earnings with asset impairment is mitigated in firms whose impairment was reversed in the following year. This finding suggests that managerial incentives may reduce the reliability of otherwise informative reversal information. The conclusions remain intact when we re-estimate the coefficients of using distinct subsamples and model specifications. Our study related to earnings informativeness of asset impairment is similar to Young and Wu (2009), which showed that firms with stronger corporate governance can moderate the 2 Some studies have extended the CKSS model to examine the earnings informativeness of financial reporting. For example, Gelb and Zarowin (2002), Lundholm and Myers (2002), and Ettredge et al. (2005) examine how firm disclosure activity or disclosure quality affects the relation between current annual stock returns and future earnings. Tucker and Zarowin (2006) find that higher-smoothing firms provide more information about future earnings than do lower-smoothing firms.