This study evaluates the potential indicators of tangible asset impairments (TAI) and their interaction with legal enforcement, using an international sample of 38 countries that follow International Financial Reporting Standards. Consistent with expectations, specific economic and opportunistic indicators demonstrate a significant relationship with TAI, and these are further affected by legal enforcement. In particular, empirical findings suggest that in weak enforcement countries, besides economic indicators, the opportunistic indicators of earnings smoothing and debt pressure are significantly related to TAI. In strong enforcement countries, the importance of economic indicators increases substantially, while the effect of the opportunistic debt-related indicator attenuates and the indicator of earnings smoothing is immaterial. This evidence suggests that legal enforcement constitutes a beneficial institutional attribute, but does not restrain all aspects of managerial opportunism.

۱٫ Introduction

Asset impairments have been of particular interest to practitioners, regulators, and accounting researchers for decades. This is not surprising for several reasons. First, asset impairments often constitute material amounts in financial statements that signal managers’ perceptions about the future performance of assets.2 There is ample empirical evidence suggesting that investors incorporate this information into security prices (Bartov, Lindahl & Ricks, 1998). Second, asset impairments represent a formal manifestation of conditional conservatism (Ryan, 2006; André, Filip, & Paugam, 2015).3 Conditional conservatism is generally perceived as a salient attribute of accounting quality because it enhances stakeholders’ monitoring and facilitates efficient contracting (Watts, 2003). Finally, although there are clearly prescribed impairment guidelines in the sets of accounting standards that currently prevail, (i.e. United States Generally Accepted Accounting Principles [US GAAP] and International Financial Reporting Standards [IFRS]), evidence of flexibility in the magnitude and timing of asset impairments recognition still exists. For example, several studies find that asset impairments recognized under US GAAP are significantly related to opportunistic indicators (Hong, Paik, & Smith, 2018). Therefore, there is justifiable interest in examining the potential causes of asset impairments, and their interaction with other factors that affect the managers’ reporting behaviors.