Are Impairments and Unrealized Losses Equally (Un)timely?

Posted: 16 Dec 2018

See all articles by Sanjay Bissessur

Sanjay Bissessur

Amsterdam Business School - University of Amsterdam

Igor Goncharov

Lancaster University - Department of Accounting and Finance

Sander van Triest

University of Amsterdam - Amsterdam Business School

Date Written: November 25, 2018

Abstract

We compare the timeliness of U.S. GAAP impairments to the timeliness of IFRS unrealized losses for investment property. Using the reporting of economic losses by U.S. and U.K. real estate firms around the time of the financial crisis, our results show that unrealized losses are substantially more timely than impairments. This result is not explained by the presence of U.S. GAAP valuation buffers, the use of undiscounted cash flows in impairment testing, the use of Big 4 auditors or the use of external appraisers, and it also holds when extending the sample to include IFRS firms from other EU countries. We argue that while both U.S. GAAP and IFRS use fair value measurements to evaluate economic losses, the recurring use of fair value measurements under the IFRS revaluation model leads to a routine implementation process, established valuation parameters, and increased investments in the valuation infrastructure. As a result, unrealized losses are likely to possess more timeliness than impairments. By showing how similar underlying transactions lead to different reporting outcomes, we contribute to the comparability literature and challenge the view that the fair value and the historical cost models provide equally timely information when the prices of non-financial assets decline.

Keywords: loss timeliness, long-lived assets, investment property, impairment, unrealized losses, real estate firms, financial crisis.

JEL Classification: M40, M41, M48, G10

Suggested Citation

Bissessur, Sanjay and Goncharov, Igor and van Triest, Sander, Are Impairments and Unrealized Losses Equally (Un)timely? (November 25, 2018). Available at SSRN: https://ssrn.com/abstract=3290175 or http://dx.doi.org/10.2139/ssrn.3290175

Sanjay Bissessur (Contact Author)

Amsterdam Business School - University of Amsterdam ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands

Igor Goncharov

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom

Sander Van Triest

University of Amsterdam - Amsterdam Business School ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

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