Financial Crisis and Impairment Recognition in Non-Financial Assets

Abstract

Purpose -To analyse the impact of the financial crisis on the recognition of non-financial asset impairments in European listed companies.Theoretical framework -The study explores the impact of the theory of measuring the economic value of non-financial assets on managers' decisions to recognize impairments, especially in the context of an economic crisis.Design/methodology/approach -Logit and ordinary least squares models were estimated to analyse the probability of recognition and the amount of impairment recognized, respectively, over a 10-year period.Findings -The results show that European companies recognized less impairments during the crisis, including companies in countries that have used external financial aid, suggesting that managers may use impairment recognition as a way of practicing earnings management.Research Practical & Social implications -The results are of interest to several stakeholders, namely: creditors, investors, financial market regulators, entities that prepare and oversee the application of accounting and auditing standards, and ultimately European leaders in terms of structural reforms and investor protection laws.Originality/value -The study contributes to the literature that analyses the impact of the financial crisis on the recognition of impairments in non-financial assets and, in particular, in the context of greater financial fragility. It also contributes to the literature on the use of discretion in the recognition of impairments and earnings management practices. Moreover, it adds to the theoretical debate regarding the principles of measurement in the context of impairment, and how this may affect assessments of the economic values of non-financial assets.

Does corporate social responsibility mitigate earnings management?

“…Managers may practice income-decreasing EM for fiscal reasons or to save earnings for future periods (Guidry et al. , 1999; Gaio et al. , 2021).…”

“…However, managing earnings not always means presenting boosted profits. Managers may practice income-decreasing EM for fiscal reasons or to save earnings for future periods (Guidry et al, 1999;Gaio et al, 2021). Additionally, existing differences and gender diversity on the board can mitigate EM and its direction .…”

Documenting, Accounting, and Valuing Material Damages Caused by Armed Aggression to the Non-Current Assets of the Company

“…Despite no studies were found out on impairment in terms of armed conflicts there are some works exploring the effect of crises and disasters on assets impairment. C. Gaio and others researched the impact of financial crisis (e.g., 2008-2009 crises) on the non-financial assets' impairments and concluded that European companies recognized less impairment during the crisis [15]. Considering Eastern European markets to which Ukraine belongs as well, B. Lisicki focused on examining the impact of the reported impairment of assets on the market reaction on the example of Warsaw Stock Exchange in the crisis conditions driven by the COVID-19 pandemic [16].…”

The Impact of Discretionary Measurement Criteria on Investors’ Judgement and Decisions

“…Measurement theory is key for financial reporting research and standards-setting [4,5]. In fact, most theoretical foundations used by accounting researchers come from the fields of economics; psychology and other social sciences.…”

“…In fact, identifying the measurement criteria most adequate is of interest to practitioners, standard setters and academics as well. Standard setters face the (mostly political) problem of identifying accounting measurement concepts that provide the needs of information for an ex-ante unknown group of heterogeneous users and settings [1,4,5].…”