Earnings management and impairment asset accounting: the case of Greek Stock Exchange companies

Abstract

The purpose of this paper is twofold: (a) to bring about issues of impairment accounting in the earning management context (b) to examine, if there is an evidence of statistically significant relationship between impairment discretionary charges and firms’ earning experience. Problem statement: Under Impairment accounting standard (IAS 36), new requirements for asset impairment are provided to satisfying accrued loss amounts. Earning Management through the use of asset impairments within constrains of taking accounting process results to “income smoothing” manipulation representing a) an external demand to meet earnings forecasts b) internal demand for communicating board’ level performance. We expect to obtain a fair view of the earnings quality and provide an answer on the prevailing content of asset impairment. The sample constituted by 202 firms, listed in the Greek Stock Exchange Market on the basis of impairment observations. We analyze the earnings levels for two groups of companies, impairers and non- impairers in both 2005 and 2006 years. Results and Conclusion: Findings suggest (a) firms recording impairment charges possess lower earnings than do their counterparts not recording write downs and (b) the impairment losses are likely reported as timely opportunity to taking “big bath” and increasing future earnings. However we estimate that Greek firms’ operating performance is engaged more by earning adjustments to a) taxable environment and b) new accounting rules, than to liable income strategies.