Earnings management concerning the impairment of assets: An empirical analysis of Philippine listed companies from 2005 until 2009

This study determines the relationship between the impairment decision, as well as its magnitude, and the earnings management motivations. The computation of value in use in the impairment loss is subject to management estimate of future cash flows and choice of discount rate, which tolerates earnings management. There are three primary earnings management motivations, which are meeting the analysts forecast, increasing management compensation and meeting debt requirements. Certain indicators and financial ratios were used to depict the effect of the three motives on impairment. In addition to this, the effect of firm size on impairment was also analyzed. The data were obtained from the OSIRIS database and the SEC form 17-A of the respective companies, as well as from telephone interviews and surveys. Probit regression was used to analyze the effect of the different motives to the impairment decision while multiple linear regressions was used for the impairment magnitude. The findings show that publicly listed companies in the Philippines are engaging in income smoothing and big bath accounting with the use of impairment. This would enable the respective companies to meet the analysts forecast, which will result to a subsequent increase in the company stock price. In addition, results indicate that most big bath happens during periods where changes in the company executive officers occur. Lastly, there is also evidence that financially strong companies are deferring their impairment recognition, so as to obtain a lower cost of financin