Implications of Impairment Decisions and Assets’ Cash-Flow Horizons for Conservatism Research

49 Pages Posted: 26 Feb 2014 Last revised: 31 Dec 2016

See all articles by Rajiv D. Banker

Rajiv D. Banker

Temple University - Department of Accounting

Sudipta Basu

Temple University - Department of Accounting

Dmitri Byzalov

Temple University - Fox School of Business and Management - Department of Accounting

Date Written: March 30, 2016

Abstract

Accountants examine multiple indicators when assessing whether individual assets are impaired. Different indicators predict cash flows over varying time horizons, and their importance varies with how far into the future individual assets are expected to generate cash flows. We predict that earnings exhibits asymmetric timeliness with respect to multiple indicators, including stock return, sales change, and operating cash flow change, which differentially explain write-downs of current assets, long-lived tangible assets, and indefinite-lived goodwill. We predict an interaction effect between indicators, such that the total impact of several consistent indicators is greater than the sum of their individual impacts. Empirical estimates for U.S. firms are consistent with our predictions and yield new insights about the effects of multiple indicators for both conservatism and impairment research. Our multi-indicator asymmetric models also change inferences about the relative explanatory power of economic factors versus reporting incentives in asset impairments.

Keywords: timely loss recognition; asset write-downs; bookable gains and losses

JEL Classification: G32, L25, M41, M42

Suggested Citation

Banker, Rajiv D. and Basu, Sudipta and Byzalov, Dmitri, Implications of Impairment Decisions and Assets’ Cash-Flow Horizons for Conservatism Research (March 30, 2016). Fox School of Business Research Paper No. 14-031. Available at SSRN: https://ssrn.com/abstract=2400812 or http://dx.doi.org/10.2139/ssrn.2400812

Rajiv D. Banker

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Sudipta Basu

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215.204.0489 (Phone)
215.204.5587 (Fax)

Dmitri Byzalov (Contact Author)

Temple University - Fox School of Business and Management - Department of Accounting ( email )

Philadelphia, PA 19122
United States

HOME PAGE: http://astro.temple.edu/~dbyzalov/

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