Optimal Impairment Rules

39 Pages Posted: 15 Jul 2008 Last revised: 25 Feb 2009

See all articles by Robert F. Göx

Robert F. Göx

University of Zurich - Department of Business Administration (IBW); University of Zurich - Managerial Accounting; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Alfred Wagenhofer

University of Graz

Multiple version iconThere are 2 versions of this paper

Date Written: February 2009

Abstract

We analyze the optimal accounting policy of a financially constrained firm that needs to pledge assets in order to raise debt capital to finance a risky project. The accounting system provides information about the value of the collateral. We show that, absent any accounting regulation, the firm finds it optimal to commit to an accounting system that is conditionally conservative in that it recognizes an impairment loss if the asset value is below a certain threshold, but never reports unrealized gains. We describe the optimal impairment rule and the optimal precision of the accounting information, and we provide comparative statics that lead to testable predictions on the determinants of impairment rules.

Keywords: Conservatism, Impairment, Debt contracting, Asset measurement, Accounting information

JEL Classification: G32, M41, M44, M47

Suggested Citation

Goex, Robert F. and Wagenhofer, Alfred, Optimal Impairment Rules (February 2009). Available at SSRN: https://ssrn.com/abstract=1160166 or http://dx.doi.org/10.2139/ssrn.1160166

Robert F. Goex

University of Zurich - Department of Business Administration (IBW) ( email )

Plattenstrasse 14
Zurich, 8032
Switzerland

University of Zurich - Managerial Accounting ( email )

Plattenstrasse 14
Zurich, CH-8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Alfred Wagenhofer (Contact Author)

University of Graz ( email )

Austria
+43 316 380 3500 (Phone)
+43 316 380 9565 (Fax)

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