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

205 NTU Management Review Vol. 29 No. 1 Apr. 2019 2. Background, Literature Reviews, and Hypotheses 2.1 Background Since the mid-1990s, both U.S. and international accounting standards have increasingly emphasized the recognition of asset impairment. The Financial Accounting Standards Board (FASB) issued SFAS No. 121 with the intent of reducing managerial flexibility and enhancing the reporting of assets impairment. Since fair value information is generally more difficult to obtain for long-lived assets due to their lower liquidity, 3 FASB reflected an increasing reliance on impairment testing and then issued SFAS No. 144 in 2001, which replaced SFAS No. 121 but did not change the latter’s general provisions. Meanwhile, the International Accounting Standards (IAS) 36, Impairment of Assets , was initially issued in 1998 and amended in 2004. Prior to 2004, Taiwan accounting rules did not address reporting issues for the impairment of long-lived assets. The SFAS No. 35, Accounting for the Impairment of Assets , was issued in July 2004 with the intent of solving reporting problems with asset impairments. SFAS No. 35 in Taiwan mandates that all listed companies must write-down the fair value on any overvalued long- term investments, fixed assets, and other assets and record the unrealized loss in annual reports. Similar to IAS No. 36, and different from the regulation of U.S., the SFAS No. 35 not only requires listed firms to write-down impaired assets when impacted but also permits impairment firms reversing their prior recognized impairments as unrealized gains when the impaired assets’ values recover. The SFAS No. 35 regulation is intended to enhance conservatism, but allowing the reversal of impaired losses provides a space for earnings management, especially for firms with unexpected losses and/or earnings smoothing (Duh et al., 2009). Permitting asset impairment reversals in subsequent periods provides managers with relatively strong incentives to use asset impairment to manipulate current and future earnings. Note that reversals after assets are written down are all observable under SFAS No. 35. We can establish a somewhat more intact sample, i.e., a reversals subsample, to capture managerial incentives which, in turn, can be used to examine the relationship between the recognition of asset impairment and earnings informativeness. 3 Watts (2003) also argues that assessing fair values requires managers to estimate future cash inflows and outflows and those estimates are unlikely to be verifiable and contractible; thus, valuation based on them are likely to be manipulated.