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

Earnings Informativeness of Long-Lived Assets Impairment Recognized and Reversals 246 6. Conclusion SFAS No. 35 (and IAS No. 1, paragraph 98) requires that the recoverable amount of written down property, plant, and equipment, along with reversals of such write-downs, if material, be disclosed separately as non-recurring items in the firm’s income statement. A non-recurring item is often viewed as transitory and should be taken as noise included within current net income which, in turn, deteriorates the informativeness of current earnings. However, long-lived asset impairment is relevant as it conceptually implies that the asset’s ability to generate future benefits has declined. Previous studies have shown that long-lived asset impairment is informative about future firm performance (Easton et al., 1993; Aboody et al., 1999; Barth and Clinch, 1998; Gordon, 2001). We suggest the informativeness of future earnings will be enhanced by recognition of long-lived asset impairment. In addition, the permission to reverse impairment of long-lived assets if economic value recovers also provides an opportunity to examine whether managers use the timing of loss recognition and reversals to achieve specific reporting objectives and thus influence the informativeness of current and future earnings. Our results suggest that the informativeness of current earnings decreases, but that of future earnings increases in firms recognizing large magnitude assets impairments. We also find that the positive association between informativeness and future earnings disappears in the subsample of firms who reverse some of their initial asset impairment in the following year. This means the informative function of impairment recognition is offset by impairment reversals. We note that the IASB and FASB provide different accounting treatments for the reversal of asset impairment losses. Our results to some extent support the findings of Ai (2005), Duh et al. (2009), Chen et al. (2009) and Zhang et al. (2010) and provide a rationale for the FASB’s prohibition of impairment loss reversals. The findings in this study are subject to a number of limitations and should be interpreted with caution. First, the study depends on a relatively small sample of asset impairment reversals, creating an asymmetric sample distribution and possibly introducing bias. Secondly, our analysis is based on the stylized CKSS model as extended by Tucker and Zarowin (2006), and caution should be taken in interpreting results for joint model fitting and the initial asset impairment effect. Finally, we focus only on the consequence earnings informativeness of managerial asset impairment recognized, any extensions of applying such standard to other settings are concerned.