An Examination of Long-Lived Asset Impairments

Prior research reveals that write-offs of long-lived assets are both large in magnitude and frequent in occurrence. Responding to calls for enhanced reporting of these items, the FASB issued SFAS 121, Accounting for the Impairment of Long-Lived Assets. However, its effect on the characteristics of reported write-offs remains unclear, as implementation requires inherently subjective estimates. Further, critics (including the SEC) maintain that the standard has failed to improve financial reporting. Motivated in part by this debate, this paper contrasts the characteristics of write-offs reported prior versus subsequent to the issuance of SFAS 121. Empirical results reveal that economic factors (consistent across macro, industry, and firm-specific variables) have a stronger mapping into write-offs reported prior to SFAS 121, supporting critics of the standard. Results also indicate that big bath reporting incentives have a higher association with write-offs reported after the standards implementation. This is consistent with managers applying more flexibility after adoption of SFAS 121, and may reflect either that managers are acting opportunistically, or that they are providing more private information about the underlying performance of their firms. The results are robust to a number of alternative specifications and variable definitions. However, my tests currently do not distinguish between the two possible interpretations of greater reporting flexibility. Finally, results from a second market-based analysis fail to provide evidence of a difference in the timeliness of asset write-offs across the two periods.