The Reversal of Impairments of PPE : A Test of Fair Value Accounting

This study examines if the reversal of impairments allowed by IAS 36 as undertaken by UK-quoted companies can be justified as unbiased adjustments to reflect the fair value of the property, plant and equipment assets to which they pertain. We test if the reversals are reflected in the change in stock market prices in an indirect test. We also employ a direct test to establish if the reversals are positively related to changes in subsequent operating performance. Our results suggest that the reversals of impairments are positively related to changes in future performance. Only those reversals that are undertaken when the pre-reversal net income is not negative are reflected in stock market returns. This is somewhat justified by the finding of a differential relation between the ability of the reversals to predict future operating performance and whether the firm is profitable pre-reversal or not. We argue that the results based on the direct test are more convincing and that our results support the decision of the IASB to allow the reversal of impairments