Tangible Asset Impairments Under IFRS: The Impact of Enforcement

Abstract

Using an international sample of 38 jurisdictions that follow IFRS, I evaluate potential indicators of tangible asset impairments (TAI) and their interaction with legal enforcement. Consistent with expectations, I find that both economic and opportunistic indicators demonstrate a significant relation with TAI and that they are further affected by legal enforcement. In particular, under weak enforcement regimes, empirical findings suggest that opportunistic indicators, such as earnings smoothing and debt pressure, are significantly related with TAI besides economic indicators. In strong enforcement jurisdictions, the importance of economic indicators, such as sales changes and market returns, enhances and the effect of debt pressure attenuates substantially. However, my results reveal that the effect of strong enforcement on indications of earnings smoothing incentives is immaterial. This evidence indicates that legal enforcement constitutes a beneficial institutional attribute but it does not restrain all the aspects of managerial opportunism.

Keywords: International Financial Reporting Standards; Tangible Asset impairments; Enforcement; Incentives

JEL Classification: M41; G15; K20