Examining the impact of impairment upon the reported financial statements Essay

  1. Literature reappraisal

Damage of non-current assets a particular nonrecurring charge taken to compose down an plus with an overstated book value. Generally an plus is considered to be value-impaired when its book value exceeds the future net hard currency flows expected to be received from its usage.

Supplying some counsel, LKAS 36 identifies a scope of factors that might be considered ‘indicators of impairment’ , and to the extent that the presence of these indexs leads to existent damage it can be argued that directors are merely following with the ordinance. A important diminution in market values is besides likely to be diagnostic of a diminution in the value of the firms’ assets.

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A company can make up one’s mind to make the damage of non current assets under the five common “indicators of impairment.” They are:

  • Evidence of physical harm, such as for a edifice damaged by fire or inundation, when the degree of harm is such that Restoration attempts are needed to reconstruct service public-service corporation.
  • Enactment or blessing of Torahs or ordinances or other alterations in environmental factors, such as new temblor criterions that a installation does non run into, and can non be modified to run into.
  • Technological development or grounds of obsolescence, such as that related to a major piece of diagnostic or research equipment.
  • A alteration in the mode or expected continuance of usage of a capital plus, such as closing of a edifice prior to the terminal of its utile life.
  • Construction arrest, such as arrest of building as a consequence of a deficiency of support.

LKAS 36 prescribes the processs that an entity applies to guarantee that its assets are carried at no more than their recoverable sum, which is the higher of the sum to be recovered through usage of the plus and the sum to be recovered through sale of the plus.

The monetary value for portions goes up and down owing to a figure of factors go oning from single concern units ( i.e. listed company ) through to a complex environment of the full economic system. Like any other trade good, in the stock market, portion monetary values are besides dependent on so many factors. So, it is difficult to indicate out merely one or two factors that affect the monetary value of the stocks. There are still some factors that are that straight influence the portion prices.-global factors, domestic Factors and local company specific factors.

The influence from within the state is by and large categorised as domestic factors. Those that are impacting on the concern and investing from outside the state are defined as planetary factors. Therefore, before purchasing or selling portions both planetary and domestic factors which may be act uponing the market is identified, and a good timing of purchasing or selling 1s portions is established.

A durable plus becomes impaired when an single durable plus ‘s ( or plus group ‘s ) carrying sum exceeds its just value. Developers should utilize three stairss to acknowledge and mensurate impairment losingss to find potentially impaired durable assets.

First, they should see whether damage indexs are present.

Second, they should prove durable assets for recoverability when certain impairment indexs arise.

Third, they should acknowledge an plus damage loss merely after measuring if the transporting sum of a durable plus is non recoverable and exceeds its just value.

The concern in this research is with howLKAS 36is being implemented and how managerial discretion is being exercised. UnderpiningLKAS 36and other ordinances ordering plus damages is the aim of necessitating directors to pass on information about future hard currency flows to fiscal statement users. This recognises that directors have private information about the firm’s hereafter chances, and ordering the revelation of such information in fiscal studies AIDSs in cut downing the information spread between directors and outside stakeholders.

An extended literature has developed measuring how directors implement ordinances necessitating the acknowledgment of diminutions in plus values, which are normally labelled write-downs, write-offs or damages.

Critically, there remains considerable discretion in the application of the ordinance, and how that discretion is exercised by and large has been addressed in a important literature following back to Holthausen and Leftwich ( 1983 ) , Holthausen ( 1990 ) and Healy and Palepu ( 1993 ) .

Harmonizing to the research of Dr. Mark P. Holtzman, William M. Sinnett they mention, using the Feltham-Ohlson theoretical account for associating accounting information to stock market values, good will is a fiscal plus that provides returns for investors.

The act of composing off good will indicates to investors that direction believes that these fiscal assets have lost value and will supply lower returns in the hereafter. Consequently, goodwill damages should cut down a company’s stock-market value. And more Academic research about good will damages indicates that good will damages are associated with overpaying for corporate acquisitions, as damages are most likely to be recorded when geting companies pay excessively much for marks.

Damages are associated with low market returns before the damage, bespeaking that market investors anticipate goodwill damages. Damages are negatively associated with corporate public presentation after the damage, bespeaking that good will, one time written off, does non go on to bring forth runing income.

Disclosures that result in the release of private information are typically labeled ‘efficient’ , and illustrations of surveies sing this include Rees, Gill and Gore ( 1996 ) who provide grounds of a positive association between plus write-offs and unnatural accumulations, and Cotter, Stokes and Wyatt ( 1998 ) who provide grounds of an association between plus damages and houses economic features. Furthermore, reputational jussive moods may supply inducements for direction to take appropriate accounting policies that reveal private information ( e.g. , Desai, Hogan, and Wilkins, 2006 ) .

However, there is besides a important literature sing timeserving inducements for accounting policy pick. Riedl ( 2004 ) is typical and identifies a inclination for plus write-offs to ensue in alleged ‘big baths’ . In this circumstance, damage may non be uncovering private information about expected future public presentation.

Consequently, the first issue necessitating reference is finding the factors impacting the

determination to set about plus damage. While this may merely reflect regulative

demands, a scope of other factors are known to act upon accounting policy pick. These are considered by and large by Field, Lys and Vincent ( 2001 ) , and includes turn toing information dissymmetries through the release of private information about expected future house public presentation.

There is other grounds in the literature that suggests that firms’ picks of accounting processs may be motivated by an effort to turn to information dissymmetries, although this tends to concentrate on intangible assets, where the signals or accounting picks are readily discernible. For illustration, Wyatt ( 2005 ) suggests that houses signal the strength of the engineering impacting the houses operations through their determinations to recognize intangible assets. Similarly, Wright, Thomas and Wu ( 2010 ) find that houses signal the uncertainness environing future returns through there accounting for R & A ; D. Furthermore, Mohd ( 2005 ) finds that houses that capitalise their package development costs suffer less information dissymmetry.

Harmonizing to the research of Dr. Mark P. Holtzman impairment loss will consequence on portion monetary value. Consequently, non current assets ( specially good will ) damages should cut down a company’s stock-market value. And more Academic research about good will damages indicates that non currents assets damages are associated with overpaying for corporate acquisitions, as damages are most likely to be recorded when geting companies pay excessively much for marks. Damages are associated with low market returns before the damage, bespeaking that market investors anticipate goodwill damages.

Damages are negatively associated with corporate public presentation after the damage, bespeaking that non current assets, one time written off, does non go on to bring forth runing income.

Shipan Sun School of Accounting, Shandong Economic University, Ji’nan 250014, China research advices that maintain the perfect plus damage accounting are of import to the company and proposed it eventually.

Harmonizing to Marcin Michalak ( University of Lodz, Poland ) research hapless quality of revelations on the appraisal of impairmemnt losingss of non current assets will impact on rating of public presentation. But non state the definite relation ship with them.

Erlend Kvaal ( BI Norwegian School of Management ) For all classs of fixed plus the indicants of stock market expectancy of the current value decrease of assets to be written down is really weak.

  1. Hypothesis

Firms held the operating assets for long period for their concern intent. But the value of non current assets altering more dramatic. They have to follow the alterations for their relevant dependability of accounting information for external accounting information users.

For our research we have following hypothesis.

Hypothesis 1: Damage of non current assets and stock monetary value positively correlated.

Hypothesis 2: – Damage of non –current assets have a important impact on stock monetary value

  1. Operational construct

Harmonizing to relevant researches, the operational construct of the research is shown below.

Figure 1





Damage of assets

Transporting value

Cash bring forthing units

Value in usage

Fair value

Book value

Production units from non current assets

Dismissing future hard currency Flows ( DFS )

Active market monetary value

cost of disposal

Cost-provision of depreciation

Sum of production

Future Cash Flows

Weaponries length dealing


Share monetary value

Company net incomes



Net income

Net assets per portion

Solvency trial

Net profit/no of portions

Net net income after revenue enhancement

Net assets/no of portions

Net assets & lt ; stated capital

  1. Methodology

This research will be descriptive surveies. The accent here is on analyzing a state of affairs or a job in order to explicate the relationship between variables.

The research is based on the qualitative and quantitative analyzes of amalgamate statements of public companies and fiscal statements of public companies. We have applies purposeful choice of the sample, which encompasses 279 fiscal statements included in stock exchange index.

The fiscal statements concern fiscal twelvemonth 2006-2011. The index is based on the monetary value alterations of the portions of the biggest and most liquid ( high turnover of portions ) entities listed on the CSE.

Consequences stemming from following phases of the research would allow the writer make general decisions as to the extend and the manner of conformity with the LKAS 36 of public companies and every bit to the quality of revelations in the fiscal statements every bit good as their utility. They besides will let to transport out comparative analysis between companies runing in different sectors ( industries ) . , every bit good as allow for comparing the scope and quality of the revelations made by the public companies.

In the secondary informations aggregation evaluate the above construction in the fiscal statement and made analysis about our aims. In Sri Lanka really rare of companies have recorded non-goodwill intangibles, and the related analyses have hence a shallower base than those of tangibles and good will.

  1. Data aggregation

Data Collection is an of import facet of any type of research survey. There are two types of informations aggregation are available. Primary and Secondary. Secondary information is informations that has already been collected by person else for a different intent to ours.

In our research we are roll uping informations secondarily from companies presented fiscal statements to the populace. In add-on secondary informations will be collected from research surveies, books, diaries, newspapers and ongoing academic working documents

When we collect the information from published fiscal studies I can carry through my analyse the grade of execution of LKAS 36 demand to the external and quality of the information generated on non current assets damage and the contemplation of public position in the portion market relevantly.

We collect the fiscal studies from CSE and single web sites of the companies which published to stack holders.

  1. Sampling method

The Colombo Stock Exchange ( CSE ) has 279 companies stand foring 20 concern sectors as at 25th April 2012.To collect my information we have select the CSE which have all relevant informations about the listed companies and portion monetary values. In Srilanka 279 companies are listed in CSE. But about 5 % of companies follow the damage of assets before amendment company act 2007. After that 98 % of companies disclosed the information about the damage of assets. But the grade of execution of LKAS 36 per centum pervert among them.

Disclosure of the regulations sing acknowledgment of damage of assets 98 % . Measure the damage and made proviso for non current operational assets 20 % .Measure the damage of good will and other intangible assets and written off the value 40 %

• good will was the most often impaired plus, with 40 % of all damages associating to goodwill

• good will was the largest plus in footings of value of impairment loss

• 65 % of companies in the sample did non unwrap a specific accounting policy note about how the impairment loss is calculated.

The period covered the companies’ most late published fiscal statements, for 2006 to 2011, based on handiness of one-year studies from CSE and place web pages of companies.

These were obtained either by mail in difficult transcript format, or downloaded electronically from the Internet. Once the published fiscal statements were obtained, the squad read the content of each study and established which companies had disclosed an impairment charge in conformity with LKAS36.

This was done by reading the net income and loss history, balance sheet, hard currency flow statement and attach toing notes to the fiscal statements. Once the procedure of look intoing the one-year studies was complete, a sample of 30 companies were found to hold charged an impairment loss. This sample companies from the 278 ( March 12 2012 ) listed companies in CSE

This fulfilled the first research aim, Internet Explorer to place those companies that have reported impairment losingss under LKAS 36.

A sample of companies listed on the CSE 278 market index that apply LKAS 36 and describe an impairment loss in their latest set of published fiscal studies were selected for analysis in this piece of research.

Finally, this study gives an appraisal of the impact of damage upon the reported fiscal statements.This takes the signifier of analysis of the impairment charge in relation to certain cardinal fiscal indexs, such as profitableness and book value of assets.

This study gives an informed analysis of the extent and impact of LKAS 36 on those corporations that have implemented the Standard and charged an impairment loss. This will function as an indicant of whether LKAS 36 is accomplishing its declared aims and how, in pattern, that affects the companies concerned.

  1. Statistical tools

I estimate arrested development coefficients for each class of plus, for each damage determination

variable, and for each state every bit good as for both states together. I test the hypothesis of equal pattern by measuring the chance of the “national” coefficients being equal.



Independent variable

Damage of assets

Transporting value

Cash bring forthing units

Value in usage

Fair value

Dependent variables

Share monetary value

Net net income


Net assets per portion

Solvency trial

  1. Key construct

Damage Of Assetss, Accounting Information, Share Price


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