Impairment of assets : an empirical investigation

Asset impairment is a relatively new term in the corporate reporting arena. However, the concept of asset impairment relates closely to that of an asset write-down. Asset write-downs historically have been a feature of corporate reporting for many years (Lee, 1975)) due to the principle of conservatism, although largely discretionary in nature in the UK until the introduction of Financial Reporting Standard 11 Impairment of Assets and Goodwill (FRS 11) in 1998. Asset impairment is defined by the Accounting Standards Board (ASB) in FRS 11 as the situation of: A reduction in the recoverable amount of a fixed asset or goodwill below its carrying amount (paragraph 2). Recoverable amount in this context is the higher of net realisable value or value in use.Prior to the issue of regulations in the area of asset impairment, there was very little guidance for corporations which may have been faced with large impairment losses. This could result in some discretion in terms of the timing and how to account for any asset impairment charge, for example either an adjustment to reserves or an expense in the income statement.The aim of this thesis is to explore the practice of impairment of assets in UK published financial statements and evaluate the concept and suitability of impairment as a means of recognising and subsequently measuring a decline in the value of a non current asset and the implications of this process. An assessment of the impact of international standards in relation to asset impairment being operational from January 2005 for UK listed corporations is also undertaken.The sample consists of those corporations listed on the UK Financial Times 100 Index (FTSE 100) of leading corporations from the period from 2003 to 2007-8.The thesis evaluates the extent of earnings management associated with asset impairment charges, both before and after the change in the regulatory environment. An assessment of whether an increase or decrease in the earnings characteristics of corporations takes place as a result of a change in the regulatory environment is also evaluated. Additionally the thesis provides a detailed assessment of the extent of disclosure associated with charging an asset impairment loss and whether this is associated with the size of the asset impairment loss. The measurement and valuation methods employed to implement an asset impairment loss are also evaluated. Other key areas of investigation focus on asset impairment losses being associated with a particular category of asset, business sector, indicator of asset impairment and a change of management.Fair value forms a component of asset impairment loss recognition and this thesis contributes to the debate about the ability of a fair value measurement approach to provide a true and fair view of the corporation