The impairment losses in non-financial assets: evidence from the Portuguese Stock Exchange.

• Author: de Albuquerque, Fabio
• Position: Report

1. INTRODUCTION

   In the specific context of non-financial assets, IAS 36 (Impairment of Assets) prescribes the procedures to ensure that the assets or group of assets of an entity, also known as cash-generating unit, are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and the Standard requires the entity to recognize an impairment loss. The Standard also specifies when an entity should reverse an impairment loss and prescribes disclosures.

   The importance of this issue can be justified by the potential effects of the recognition of impairment losses in the financial statements of an entity, both in terms of changes in financial position in terms of performance changes. When the value of the asset is changed (its fair value less costs to sell or its value in use, whichever is greater, is less than its recoverable amount), the resources of an entity as a whole change in value.

   Thus, it is of fundamental interest to users of information, which include lenders and investors, the appropriate knowledge of the change in financial position and current performance and its future implications, arising from the recognition of impairment losses. Consequently, the recognition of impairment losses for an asset or a group of assets of an entity can affect the decision of the users of financial information, taking into account the impact of the decline and the significance of the information provided.

   If impairment losses are important because they have the assets for its recoverable amount, it becomes necessary to understand the motivations that underlie their recognition, issues that have attracted the attention of numerous researchers in the field of accounting (e.g. Strong and Meyer: 1987; Elliot and Shaw: 1988; Zucca and Campbell: 1992; Elliot and Hanna: 1996; Francis: 1996; Basu: 1997; Bunsis: 1997; Elliot and Shaw: 1998; Alciatore: 2000; Riedl: 2004; Kvaal: 2005; Chen: 2008; Choi: 2008; Yanamoto: 2008) with particular focus in the late 80s of last century, and since then until today.

   The changes in the international arena as a result of globalization, and, directly related to this, the international harmonization of accounting, have brought even more interest to the topic, given that the impacts of accounting beyond, increasingly, national borders.

2. THEORETICAL FRAMEWORK

   According to study conducted by Duh et al (2009), there are two main approaches of research related to the impairment of assets. It is noteworthy that many of the studies that will be analyzed at this point seems to do the necessary distinction between the terms "write-down, write-off" and "impairment loss." For the literature review presented in this chapter, however, were generally treated as impairment losses.

   The first examines the public's reaction and the market regarding disclosure of impairment losses and the second investigates the characteristics and motivation of the entities for the recognition of impairment losses. Alciatore et al (1998) as Zucca and Campbell (1992) in a literature review about this theme found that the research has centered on the following questions:

   What are the characteristics of write-downs, including their significance to firms' total assets and earnings?

   What are the characteristics of write-downs firms, including whether there are incentives in such firms to manage earnings?

   When a firm records or announces a write-down, what is the association between (any) change in firm market value and the write-down/earnings?

   Are write-down recorded in a timely manner, or is there a difference between when the asset becomes economically impaired, and when it is written down on the books?

   In any case, it seems consensus among researchers the relevance of this topic as well as the impact of that information to different users in the process of decision making (Elliott and Shaw: 1998; Zucca and Campbell: 1992; Francis et al: 1996; Rees et al: 1996; Buns: 1997; Deng and Lew: 1998). Studies have shown ratio of impairment (total impairment losses occurring during a period compared to total assets) with average values between 4% and 19.4%, with median values ranging between 1.5% and 19 6%. The ratio of impairment contains in the numerator the value of impairment recognized in each period and in the denominator the total of net assets. There is, however, authors that use other indicators in the denominator such as the total of sales.

   Moreover, the maximum amount of impairment losses compared to total assets may have values that reach 90%, which gives indications of possible impact and relevance of the issue in analysis.

   Many studies still leave the primary analysis of the impairment ratio to determine the sample under investigation, using in most cases the impairment ratios above 1%, called "special items" (Elliott and Shaw: 1988, Elliott and Hanna: 1996).

   More recently, Kvaal (2005), based on a sample of 238 entities selected from the FTSE 350 index during the accounting period ended in 2002, found a ratio of total impairment in the order of 3.3%, with specific ratios for tangible assets, intangibles (excluding goodwill) and goodwill, of 1.7%, 0.4% and 6.4% respectively.

   Yanamoto (2008) examined the specific content of impairment losses of noncurrent assets disclosed by 357 entities, from 2004 to 2006. The number of entities that have recognized a impairment loss during this period was respectively 24, 61 and 272, finding a number equivalent to 211 entities that have not recognized any such loss during the same period. The ratio of impairment, in turn, had average values of 1.19%, 0.92% and 0.95% with a median of 1.0%, 0.45% and 0.34% respectively. It is curious to note, therefore, that the ratio of impairment is not a direct relationship with the number of entities which are experiencing such losses.

   It should be emphasized that some studies indicate that the majority of impairments are recognized in the last quarter of the reporting period from the accounts of entities under analysis, which for some researchers may indicate the use of techniques of earning management.

   Research related to the earning management (Strong and Meyer: 1987; Zucca and Campbell: 1992, Easton et al: 1993, Francis et al: 1996, Rees et al: 1996; Heflin and Warfield: 1997) is, in general, also related to studies surrounding the perception of market reactions, particularly for investors, for the recognition of impairment losses disclosed by entities (Strong and Meyer: 1987, Elliott and Shaw 1988; Zucca and Campbell: 1992 , Francis et al: 1996, Elliott and Hanna: 1996; Buns: 1997, Deng and Law: 1998, Bartov et al: 1998, Hogan and Jeter: 1998).

   These studies arrive at an approach based on content analysis to analyze the market reactions to announcements of impairment, reporting generally negative associations between a long interval of return and recognition of losses (measured as a positive number). Research related to this issue continues the debate on this issue in recent years (Riedl: 2004; Hsieh and Wu: 2005, Beatty and Weber: 2004; Chao: 2006 and Choi: 2008).

   The analysis of market reactions to the recognition of impairment losses is its connection with the timeliness of information to the extent that the market had already perceived and reacted to these losses. Additionally, some studies have provided evidence that entities recorded impairment losses already had a worse performance in the face of historical entities in the same sector or control group. Thus, in the same field studies have revealed that, in general, no impairment losses were recognized on a timely basis to the extent that the market had perceived and anticipated losses (Easton et al: 1993; Elliott and Hanna: 1996; Easton and Eddey: 1997; Heflin and Warfield: 1997; Barth and Clinch: 1998; Collins and Henning: 2000; Ball and Shivakumar: 2005; Chen et al: 2008; Choi: 2008; Jarva: 2009). This analysis thus represents a starting point for the development of studies, mainly based on techniques of association, whereby the authorities do not recognize impairment losses on a timely basis.

   Studies dealing with impairment losses have contributed to the development of future research projects and to resolve inconsistent results (Bunsis: 1997; Alciatore et al: 2000; Collins and Henning: 2004).

3. METHODOLOGY

   The professional judgment is always present in the preparation of financial statements. Accordingly, impairment losses should be adequately disclosed in the interests of transparency of financial information disclosed by the entities, or in other words, of understandability as a qualitative characteristic of financial information (Zucca and Campbell: 1992). It should be understood in that sense that the comparability of information also can be affected by the existence of different forms of presentation and disclosure, or even by its absence, of matters relating to impairment losses. In order to analyze the existence of the significant association or differences between the disclosure of impairment losses and certain factors that distinguish the entities covered by this study, were developed the following hypotheses:

   ...