This paper aims to provide evidence that will inform the convergence debate regarding accounting standards. The authors assess the ability of impairment reversals allowed under International Accounting Standard 36 but disallowed by the Financial Accounting Standards Board to provide useful information about a company.
The authors use a sample of 182 Malaysian firms that reversed impairment charges and a matched sample of firms which chose not to reverse their impairments. Further analysis examines if reversing an impairment charge is associated with motivations for and evidence of earnings management.
The authors find no evidence that the reversal of an impairment charge marks a company out as managing contemporaneous earnings. However, they document evidence that firms with high levels of abnormal accruals and weak corporate governance avoid earnings decline by reversing previously recognized impairments. In addition, companies that have engaged in big baths as evidenced by high accumulated impairment balances and prior changes in top management, use impairment reversals to avoid earnings declines.
The results of this study support both the informative and opportunistic hypotheses of impairment reversal reporting using Financial Reporting Standard 136.
The results also demonstrate how companies that use impairment reversals opportunistically can be identified.
The results support IASB’s approach to the reversal of impairments. They also provide novel evidence as to how companies exploit a cookie-jar reserve created by a prior big bath opportunistically.
