sustainability

Review
Does the Mark-to-Model Fair Value Measure Make
Assets Impairment Noisy?: A Literature Review
Tadeusz Dudycz * and Jadwiga Praźników
Faculty of Computer Science and Management, Wrocław University of Science and Technology, Wyb.
Wyspiańskiego 27, 50-370 Wrocław, Poland; wydz.inf.zarz@pwr.wroc.pl
* Correspondence: tadeusz.dudycz@pwr.edu.pl; Tel.: +48-71-320-3504




Received: 27 December 2019; Accepted: 15 February 2020; Published: 18 February 2020


Abstract: With the purpose of reporting high-quality, transparent, and comparable information
in financial statements, there is a strong, visible trend towards the implementation and use of
International Financial Reporting Standards (IFRS), which represent the Anglo-American accounting
model. According to IFRS, the fair value has become a dominant measurement paradigm. The purpose
of this paper is to examine the implications of the implementation of the mark-to-model fair value
measures for asset impairment tests on the relevance and reliability of information presented
in financial reports. Among the three levels of the fair value hierarchy, mark-to-model is most
controversial because it is susceptible to manipulation and has poor verifiability. After a systematic
literature review and a synthesis of high-quality contributions in this field, we conclude that the
implementation of asset impairment tests, that use the mark-to-model fair value measures, is not
promising for increasing the quality and reliability of the information presented in financial statements.
Unfortunately, research has shown that companies are using that tool to manage their earnings and
promote managers’ unethical behaviour. Furthermore, capital markets’ reaction to asset impairment
announcements is negative. Performed analysis can provide valuable pointers for standard setters,
accounting policy makers, and researchers.

Keywords: IFRS; asset impairment; earnings management; accounting models; asset write-offs; fair
value; mark-to-model

1. Introduction
As suggested by Coase [1], whenever an economic theory attempts to discover the most
effective way to organise business operations, the technical tools of their implementation depend
on the accounting. As highlighted by Nobes [2], there are two classes of accounting models.
The Anglo-American model is adopted in countries with a strong capital market and orientation towards
external shareholders. On the other hand, the Continental (European) model focuses on creditors’
and other stakeholders’ information requirements, especially those of tax authorities. The realisation
of this concept may be recognised mainly in countries with a weak capital market. The aim of
the Anglo-American model is to inform equity investors and allow discretion in the preparation of
financial reports, as far as the resulting statement provides the “true and fair value”. Conversely,
the Continental model concentrates on the creditors and requires highly codified reporting [3].
The Anglo-American model is neutral, whereas the Continental model is prudent and focuses on
preventing assets’ over-valuation by setting the book value higher than the market value.
Accounting has also been influenced by the debate about the benefits and consequences of
principles-based versus rules-based accounting standards conducted for decades [4]. Principles-based
accounting standards are characterized by a clear declaration of intent but do not provide
detailed guidelines for implementation. By contrast, rules-based standards provide more details

Sustainability 2020, 12, 1504; doi:10.3390/su12041504 www.mdpi.com/journal/sustainability

Sustainability 2020, 12, 1504 2 of 24

on implementation and compliance. Proponents of principles-based standards, however, agree that

they create space for various uses, but this space is reduced when the assessment is made by specialists
who correctly interpret the intentions of the standards. By contrast, proponents of rules-based standards
say that they reduce the diversity of use, which increases the consistency and comparability of financial
statements. Opponents, in turn, emphasize that they tend to follow the letter of the rules, losing its
spirit [5].
There is a visible trend nowadays towards implementing and using International Financial
Reporting Standards (IFRS), an approach that represents the Anglo-American mentality [6].
However, IFRS are considered as principles-based standards, while US Generally Accepted Accounting
Principles (GAAP) are rules-based [5]. A slightly different opinion is presented by Schipper [7] who
thinks that both US GAAP and IFRS belong to principles-based standards. The greatest success of
the International Accounting Standards Board (IASB), which is the issuer of IFRS, occurred in 2005,
when Regulation No. 1606/2002 [8] was adopted by the Parliament and the Council of the European
Union (EU), dictating mandatory use of the IFRS by all companies listed in the EU, for the preparation
of their consolidated financial statements from 01 January 2005 onwards. Furthermore, many other
countries replaced their national standards with IFRS for some or all of the domestic companies.
Today, 144 jurisdictions require IFRS for all or most domestic publicly accountable entities in their
capital markets [9]. There were a number of expected advantages attached to this widespread IFRS
adoption, including more efficient cross-border transactions, enhanced information transfer of financial
reports (increased transparency), greater inter-company comparability of financial data, better asset
prices (efficiency), lower cost of capital, and balance sheets that facilitate more efficient contracting
between companies and lenders [10]. Optimism and the scale of the expectations from the IFRS
implementation were well portrayed by Damant [11] (p. 29), who noted that, ‘The impact will be
enormous. Even before we come to positive advances, many billions will be saved by the fact that scarce capital is
no longer invested in the wrong places at the wrong prices. And this benefit can spread throughout a country
and internationally, producing wealth which can benefit even the poorest people and the poorest countries. It is
hard to imagine any other technical device, in the hands of very few specialist professionals, which could have
such a widespread beneficial effect on the world as a whole.’ However, in 2005, Ball [12] (p. 24) warned
that, ‘Internationally uniform accounting rules are a leap of faith, untested by experience or by a significant
body of academic results’. The greatest consequence of popularising the Anglo-American mentality
through IFRS was substituting cost-based measures with market-based measures. The fair value has
been seen as the dominant paradigm for measuring financial instruments and is also increasingly
used to measure non-financial items [13]. A clear increase in the use of fair value measures to test
the impairment of assets had a place after the financial crisis in 2008-2009. Although, Christensen
and Nikolaev [14]—examining financial statements of British and German companies from 2005 to
2006—found a very limited use of fair-value accounting. While after the crisis a radical increase of the
fair-value measure to test assets impairment use was noted [15]. For example, 16 European power and
utility companies had more than €30 billion of assets and goodwill impaired between the years 2010
and 2012 [16]. The fair value paradigm rests on the decision usefulness paradigm [13]. IFRS 13 creates
a hierarchy of inputs into fair value measurements, from the most to the least reliable, as follows:
Level 1 inputs are the quoted prices in active markets for identical assets or liabilities that the entity can
access at the measurement date. ......
Level 2 inputs are the inputs other than quoted market prices included within Level 1, that are observable
for the asset or liability, either directly or indirectly. .......
Level 3 inputs are the unobservable inputs for the asset or liability’ [17] (pp. 10–11).
Thus, market prices represent the best estimate of the fair value, so long as the market conditions
satisfy the fair value definition. Ball [12] agrees that the fair values contain more information than
historical costs but only if one of the following conditions exists:

1. Observable market prices that managers cannot materially influence due to less than perfect
market liquidity.
Sustainability 2020, 12, 1504 3 of 24

2. Independently observable, accurate estimates of the liquid market prices.

Therefore, fair value will promote the relevant accounting numbers only in countries with
well-developed capital markets characterised by high liquidity and the necessary information available
for the fair value measurement [18]. However, the implementation of fair value in weak markets is more
likely to increase unreliable information and noise in financial information streams. Additionally, if the
market is illiquid, estimating the fair value is more likely to provide an opportunity for managers to
manage and manipulate the earnings [19]. In addition, although IFRSs are applied to principles-based
standards and are characterized by many possibilities of interpretation, they are to some extent
rules-based [5]. As reported by Leuz et al. [20], accounting rules and how well they are enforced
have a crucial impact on the properties of reported earnings. Accounting rules probably reflect the
country’s legal and institutional framework. According to Leuz et al. [20], companies in continental
Europe manipulate profit more than Anglo-American countries. However, the most problematic
and controversial aspect is the estimation of fair value on the basis of inputs, where prices cannot
be observed on the market. This applies mainly to the valuation of the non-financial positions for
which fair value is estimated, using mark-to-model approaches [13]. In this case, fair value accounting
becomes mark-to-model accounting and the firms report only estimates of the market prices, rather than
the actual market prices. This introduces ‘model noise’, due to imperfect pricing models and imperfect
estimates of model parameters. Mark-to-model accounting also increases opportunities for managers to
undertake financial manipulations, as they can influence both, the choice of models and the parameter
estimates [12].
Consequently, the main premises of IFRS popularisation may not be achieved, as the base goal of
the fair value concept is to support investors in their investment decisions by showing information
more accurately, in order to measure the amount, timing, and uncertainty of (the prospects for) future
net cash inflows to the entity. This allows them to assess their expectations about returns from an
investment in equity and debt instruments [21]. Even where the mark-to-model approach applies,
in accordance with IAS 36 and IAS 38, there is a requirement to periodically review long-term tangible
and intangible assets in terms of possible impairment to fair value. However, the proper functioning of
this approach will have a significant impact on the quality of information presented in the financial
statements. Given this context, the main aim of the paper is to analyse the current state-of-the-art,
concerning the influence that the mark-to-model fair value accounting has on IFRS asset impairment
tests, particularly in terms of the quality, comparability, and perception of information presented in
financial statements.
To achieve that purpose, a systematic literature review was performed with the following: The final
data sample, covering 46 papers published in journals, contained an impact factor, including the
history of the impairment standards’ development and associated research during the research period
from 1996 to 2016. The whole article is organised as follows: the review approach shows the selection
criteria and quality thresholds of the asset impairment literature. It also includes an overview of
the publications examined during the research period, as well as the data sample characteristics—by
aggregation—of the articles on the main topics and the methodology used. In the asset impairment
state-of-the-art review, we present papers that focus on the main topics of the collected literature,
and the main findings section presents a knowledge development synthesis and the current trend of
the development of research along with future directions.

2. Literature Review

2.1. Selection of Articles

A review was performed to collect the necessary literature and involved searching for materials
relevant to the subject of asset impairment in the following databases: Web of Science, Scopus, EBSCO,
Research Gate, Google Scholar, JSTOR, and SpringerLink, as displayed in Figure 1. The planning of the
research approach began with the preparation of the research questions provided below:
forward snowballing to expand the data sample and review potential publications associated with
the subject of research [22]. Thus, we identified a sample consisting of 138 publications. Next, during
the review of the data, we rejected publications that did not fully cover the research questions and
excluded 40 articles. The last step was to introduce a quality threshold, so we decided to keep only
those articles 2020,
Sustainability in the
12, sample
1504 that were available in the Web of Science or the Scopus database, which
4 of 24
resulted in 46 publications.

1. Selecting databases: Web of Science, Scopus, EBSCO, Research Gate,

Google Scholar, JSTOR, SpringerLink.
2. Definition of selection criteria: impairment of assets; IFRSs; goodwill

Number of publications:

3. Backward snowballing, to check which studies relevant studies cite.

Number of publications:

5. Rejection of papers not covering the research questions.

6. Organisation of the review by:
a. Approach: theoretical, based on a data sample and case study
publications.

Initial data sample:

7. Papers from the Web of Science or Scopus database.

Final data sample:

Figure 1. Systematic
Figure research
1. Systematic approach.
research approach.

RQ1: Which
2.2. Overview areas are
of the Research onconsidered in publications associated with asset impairment?
Asset Impairment
RQ2: What is the current trend of the development directions for asset impairment?
There has been a visible increase in the number of scientific articles that focus on the topic of
Based on the research questions, the definitions of selection criteria were provided, after which
asset impairment, since the first papers found in the mentioned databases, which were published in
the preliminary research resulted in 60 publications. Then, we decided to implement backward and
1996. In Figure 2, three big peaks can be recognised in the years 2011, 2013, and 2015. The year 2011
forward snowballing to expand the data sample and review potential publications associated with the
can be identified as scientists’ answer to the financial crisis from 2008 to 2009. Such a large slump
subject of research [22]. Thus, we identified a sample consisting of 138 publications. Next, during the
exposed many of the weaknesses in the existing accounting standards, including the delayed
review of the data, we rejected publications that did not fully cover the research questions and excluded
recognition of credit losses. Also, in November 2009, the IASB proposed an impairment model in an
40 articles. The last step was to introduce a quality threshold, so we decided to keep only those articles
Exposure Draft, based on expected losses rather than incurred losses. In 2012, Ramanna and Watts
in the sample that were available in the Web of Science or the Scopus database, which resulted in
[23] provided evidence of the use of unverifiable estimates in required goodwill impairment. That
46 publications.
paper mentioned the case of the quality of write-off disclosure, along with an investigation into
whether firms with
2.2. Overview of thethe abilityonand
Research Assetmotives to manage SFAS 142 on goodwill impairment losses
Impairment
actually do so. As of 10 November 2017, 315 other sources have cited that paper, which is one of the
There has been a visible increase in the number of scientific articles that focus on the topic of asset
impairment, since the first papers found in the mentioned databases, which were published in 1996.
In Figure 2, three big peaks can be recognised in the years 2011, 2013, and 2015. The year 2011 can be
identified as scientists’ answer to the financial crisis from 2008 to 2009. Such a large slump exposed
many of the weaknesses in the existing accounting standards, including the delayed recognition of
credit losses. Also, in November 2009, the IASB proposed an impairment model in an Exposure Draft,
based on expected losses rather than incurred losses. In 2012, Ramanna and Watts [23] provided
 Sustainability 2020, 12, 1504 5 of 24

evidence of the use of unverifiable estimates in required goodwill impairment. That paper mentioned
the case of the quality of write-off disclosure, along with an investigation into whether firms with
the ability and motives to manage SFAS 142 on goodwill impairment losses actually do so. As of
Sustainability 2020, 12, x FOR PEER REVIEW 5 of 25
10 November 2017, 315 other sources have cited that paper, which is one of the highest number of
citations
highest numberin theofdata sample
citations anddata
in the resulted
sampleinand
an increase
resulted ofin papers in 2013.
an increase Besides,
of papers in March
in 2013. 2013,
Besides,
in the
MarchIASB presented
2013, the IASBa presented
new Exposure a newDraft to recognise
Exposure credit losses
Draft to recognise on losses
credit a timelier basis. The
on a timelier final
basis.
proposition of the IFRS 9 standard and the date of implementation estimated
The final proposition of the IFRS 9 standard and the date of implementation estimated for 2018 could for 2018 could have
influenced
have influenced thethegrowth
growthininthe
thenumber
numberofofpublications
publications during. Amongthe
during. Among themain
mainscopes
scopes ofof research
research
in the papers were the quality of write-off disclosure and findings about earnings management byby
in the papers were the quality of write-off disclosure and findings about earnings management
impairment
impairment disclosure.
disclosure. OutOutof of
thethe 9 papers
9 papers published
published in in 2015,
2015, three
three were
were published
published in in journals
journals with
with
anan impact
impact factor
factor higher
higher than
than 1 point.
1 point.

Reviewed publications Polynominal trend line

10 9
9
8
7
6 5 5
6
5
4 3 3
3 2 2 3
2
2 1 1 1 1 1
1 1
0
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016
Figure 2. 2.
Figure Chronological development
Chronological developmentofofthe
thenumber
number of scientific articles
of scientific articlesininthe
thedata
datasample,
sample, 1996–
1996–2016.
2016.
Considerable publication activity is visible in Accounting & Finance (6 articles), the Australian
Considerable
Accounting publication
Review activity
(5 articles), and is
thevisible in of
Journal Accounting & Finance
Accounting Research(6(4articles),
articles),the Australian
with Elliot and
Accounting Review (5 articles), and the Journal of Accounting Research (4 articles),
Hanna’s [24] paper about the market reaction to the asset impairment announcement showing with Elliot and555
Hanna’s
Google[24] paper
Scholar about the
citations (as market reaction 2017).
of 10 November to the asset impairment announcement showing 555
Google Scholar citations (as of 10 November 2017).
2.3. Data Sample Characteristics
2.3. Data
ToSample Characteristics
identify the most important topic in the research area, the sample was grouped into fields.
Table 1 presents
To identify thethe 4 major
most topicstopic
important for impairment within
in the research thethe
area, 15sample
articleswas
presenting
groupedfindings about
into fields.
the 1determinants
Table presents the of asset topics
4 major impairment. However,
for impairment this the
within subject is still presenting
15 articles being analysed to find
findings aboutout
thewhich financialof
determinants and non-financial
asset impairment. factors influence
However, value impairment
this subject is still being(e.g., Bens to
analysed [25];
findRees
outetwhich
al. [26];
Zhuang [27]).
financial and non-financial factors influence value impairment (e.g., Bens [25]; Rees et al. [26]; Zhuang
[27]).
Table 1. Main topics of asset impairment research (n = 46).
Table 1. Main topics of asset impairment research (n = 46).
Main Topics Number of Publications
Main
Earnings Topics
management Number of16
Publications
Factors influencing
Earnings write-offs
management 15
16
Market reaction to asset
Factors impairment
influencing announcements
write-offs 5
15
Value-in-use discount rate 4
Market reaction to asset impairment announcements 5
Firms’ investment opportunities’ influence on impairment 2
Value-in-use
Goodwill impairment’s discount
impact ratecash flows
on future 2 4
Firms’Impairment
investment opportunities’ influence on impairment
characteristics in a particular country 12
Implications for asset impairment
Goodwill impairment’s impact on future cash flows 12
Grand total
Impairment characteristics in a particular country 461
Implications for asset impairment 1
Grand total 46
Sustainability 2020, 12, 1504 6 of 24

The methodology used in the reviewed publications centres on regression analyses, with a sum of
21 papers (as shown in Table 2) generally representing this particular research approach and greatly
limiting the capabilities for further improvement of the methods provided. It seems to be the most
representative way for researchers to measure the factors influencing write-offs. Many regression
variants can be found in the data sample, for example, the ordinary least squares (OLS) regression
model [28,29] and the probit model, whereby the dependent variable can only take two values to find
the explanatory variables for the impairment decision [30]. To determine the impact of hypothesised
drivers on the write-off decision, Garrod et al. [31] estimated four separate logistic regressions for the
companies included in the total sample. Mathematical models, such as the random-forest (RF) model
provided by Chen and Wu [32], have also focused on the asset impairment drivers. The diagnosis
of the asset impairment factors, presented by Chen and Wu [32] used the RF model, showing a new
approach to calculating asset impairment other than regression analyses. The magnitude of potential
determinants, including financial information, the economic environment, and management incentives,
complicates the process of verifying the asset impairment test’s correctness. For the study, the authors
used the RF model, suggesting that it outperforms the linear models, such as logit or tobit models,
as it is more parsimonious and produces more consistent results. However, the authors admitted
that the improvement shown was not as significant as expected and that there other factors still need
to be included to obtain a more accurate model specification. The research sample also contained
questionnaire surveys, mainly relating to the topic of management decisions regarding impairment
announcements and test performance [33].

Table 2. Methodology used in the reviewed publications (n = 46).

Methodology Number of Publications Reviewed

Regression analyses 21
Descriptive analyses 10
Mathematical and simulation models 6
Discussion papers 2
Factor analyses 2
Structural equation models 2
Case studies 1
Statistics of questionnaire surveys 1
Theory papers 1
Grand total 46

Regression analyses were a predominating methodology used in the research. After deeper
investigation, we excluded 90 independent variables and recognised a few factors that were commonly
used by the authors. Company size, expressed by either total assets or a logarithm of firms’ sales, was
the most commonly used factor. That, together with market-to-book ratio (i.e., the second most popular
factor used), were mentioned by Francis et al. [34], suggesting that those measures are still adequate in
terms of asset impairment factors. As shown in Figure 3, a total of 9 papers recognised goodwill as
another significant independent variable. The most interesting variable was CEO, which describes a
management change (particularly with the CEO position) during the research period or the last year
of the CEO’s tenure. Seven papers mentioned CEO as a factor to consider if there are management
incentives on write-off announcements.
Sustainability 2020, 12, 1504 7 of 24
Sustainability 2020, 12, x FOR PEER REVIEW 7 of 25

LIST 2
BLOCK 2
LIQ 2
ROE 2
GDPR 2
IMPR 2
UCC 2
BETA 2
P 2
E 2
INDUS 3
Independent variables

AuditQual 3
YEND 3
DEBTRATIO 3
CGU 3
E* 4
LOSS 4
ROA 6
AR 8
PREIM 6
CFO 5
SALES 5
CEO 7
GWA 8
LEV 9
B/M 12
SIZE 14
OTHER 63
0 10 20 30 40 50 60 70
Number of publications

Where: SIZE—Company
Where: SIZE—Company size measured
size measuredas theastotal
the assets at the at
total assets endtheofend
yearoft year
or calculated as a logarithm
t or calculated as a of
firmslogarithm of firms
sales in year sales in year t. B/M—Relationship
t. B/M—Relationship between book tobetween book toLEV—Leverage
market value. market value. LEV—Leverage
measured as the total
measured
liabilities as the
divided bytotal
totalliabilities
assets atdivided
the end byoftotal
yearassets
t, orattotal
the end
debtofscaled
year t, by
or total
marketdebtvalue.
scaledGWA—Goodwill
by market
value. GWA—Goodwill value. CEO—Measure considered in research as a management change, new
value. CEO—Measure considered in research as a management change, new CEO in year t, or the last year of
CEO in year t, or the last year of his tenure. SALES—Sales growth. CFO—Change or value of operating
his tenure.
cash flowsSALES—Sales
over the year growth. CFO—Change or value
t. PREIM—Pre-impairment of operating
earnings in yearcash flows overreturn,
t. AR—Market the year t. PREIM—Pre-
considered
impairment
as a share return of firm in year t. ROA—Return on Assets. LOSS—Absolute value of lossROA—Return
earnings in year t. AR—Market return, considered as a share return of firm in year t. before
reversals.
on Assets. E*—Accounting
LOSS—Absolute valueearnings per share
of loss before after adding
reversals. back the after-tax
E*—Accounting earnings write-down
per share after amount.
adding back
the CGU—Measures
after-tax write-down if firmamount.
has moreCGU—Measures
than one cash-generating
if firm has unit.more
DEBTRATIO—Firms total debt unit.
than one cash-generating
divided by total assets.
DEBTRATIO—Firms total debtYEND—Measures
divided by totalifassets.
observation is for the post-transition
YEND—Measures if observationregulatory change.
is for the post-transition
AuditQual—Measures if the firm is audited by a one of Big 4 auditor (PwC, EY, Deloitte or KPMG).
regulatory change. AuditQual—Measures if the firm is audited by a one of Big 4 auditor (PwC, EY, Deloitte or
INDUS—Industry indicator. E - Reported accounting earnings per share. P—Price per share at the end
KPMG).of t. INDUS—Industry
BETA—Beta coefficient indicator.
of firmE in
- Reported accounting earnings
year t. UCC—Measure per share. conservatism
of unconditional P—Price per shareof firmatinthe end
of t. year
BETA—Beta coefficientgoodwill
t. IMPR—Lagged of firm impairment
in year t. UCC—Measure
loss. GDPR—GDP of unconditional
growth rate. conservatism
ROE—Return of onfirm in year t.
Equity
LIQ – Measure
IMPR—Lagged represented
goodwill by cash
impairment holding,
loss. GDPR—GDPor cash growth
holding rate.
divided by total assets.
ROE—Return BLOCK—The
on Equity LIQ – Measure
cumulative
represented percentage
by cash holding, of outstanding
or cash holding common shares
divided held by
by total blockholders
assets. BLOCK—The holding and who percentage
cumulative are not of
part of the board of directors. LIST—Measures if company is cross listed on stock exchanges.
outstanding common shares held by blockholders holding and who are not part of the board of directors. LIST—
Measures if company is cross 3. Independent
Figurelisted variables used in regression analyses.
on stock exchanges.

Figure
3. State-of-the-Art Review 3. Independent
of Asset variables used in regression analyses.
Impairment

3.1. Factors Influencing

3. State-of-the-Art the Writing
Review off ofImpairment
of Asset Asset Value
The appearance of an asset impairment scale was not examined often in the research sample.
3.1. Factors Influencing the Writing off of Asset Value
One of the first studies on the determinants of asset impairment, presented by Cotter et al. [35],
showed Thethat
appearance of an
the average asset impairment
write-off scale was
was $10 million and not examined
consisted of a often
0.044 in theofresearch
part sample.
the asset sum.
One of the first studies on the determinants of asset impairment, presented by Cotter et al. [35],
showed that the average write-off was $10 million and consisted of a 0.044 part of the asset sum. One
of the most commonly reported factors influencing the write-off announcement was widely
Sustainability 2020, 12, 1504 8 of 24

One of the most commonly reported factors influencing the write-off announcement was widely
understood as the shaping of business profitability. A negative correlation of this factor with the
influence of asset impairment was reported by Rees et al. [26], Giner and Pardo [30], Garrod et al. [31],
Cotter et al. [35], AbuGhazaleh et al. [36], Kabir and Rahman [37], and Lapointe-Antunes et al. [38].
These researchers showed that a decline in profitability (i.e., a return of equity) influences write-offs’
appearance. Lapointe-Antunes et al. [38] suggested that the recognition of goodwill impairment is
caused by companies’ willingness to minimise the deviation of the ROE (return of equity) and ROA
(return of assets) indicators from the industry median. Laskaridou and Vazakidis [39] showed a
statistically significant difference in the ROA factor between impairment and non-impairment firms,
which implies that companies with lower earnings are more prone to announce write-offs and then
reduce their diminished earnings (confirmed also by Godfrey et al. [40] and Yang et al. [41]). Kvaal [42]
has shown that an incorrectly applied pre-tax discounting may affect small impairment recognition,
due to small discount rates, which consequently do not meet the standards setters’ ambition to achieve
the same present value as after post-tax discounting.
A significant factor recognised by Fernandes et al. [43] and Szczesny and Valentincic [44] is the size
of the company. Fernandes et al. [43] found that the probability of an impairment loss announcement
is correlated positively with an affiliation to the biggest business entity and negatively with the
market value. Moreover, Alciatore et al. [45] showed that a decline in asset values, reflected in returns
prior to the impairment announcement, is correlated with the write-down amount. A change in
management is a relevant systematic factor demonstrated in the articles. This dimension was mentioned
by Bens [25], Giner and Pardo [30], Chen and Wu [32], Cotter et al. [35], AbuGhazaleh et al. [36],
Lapointe-Antunes et al. [38], and Bond et al. [46]. The results in those articles suggest that the decision
about impairment recording is more associated with managers’ incentive to convey expectations
about their good performance, rather than presenting reliable information to the stakeholders about
the company’s financial condition. Zhuang [27] pointed out in his paper that, when measuring
the CEO changes as one of the impairment factors, researchers need to consider the nature of CEO
changes and to determine whether any patterns of asset impairment emerge. On the other hand,
the research sample contained two reports showing no influence in management incentives on write-off
announcements. Chen and Wu [32], analysing the factors using the random-forest model, showed
that more weight is placed on financial information than on the economic influence or management
incentives. Kabir and Rahman [37] also indicated a weak association between contracting incentives
and goodwill impairment.
A higher probability of asset write-offs, according to the accounting approach, was shown by
Vogt et al. [47], who stated clearly that companies that record asset write-offs are probably more
conservative in their accounting policy, as there are significantly smaller differences between net
revenue and cash flows for the previous financial year for them. Companies with a more aggressive
accounting policy approach usually have a larger difference between net revenue and cash flows.
AbuGhazaleh et al. [36] and Kabir and Rahman [37] showed that impairments are strongly associated
with the governance mechanism. The important findings of Kabir and Rahman’s [37] research suggest
that a strong government in a company increases the connection between economic factors and asset
write-offs. However, a strong government cannot definitively eliminate illegitimate asset impairment
announcements, especially when the income before the write-off is declared as negative and when
the value loss occurs in the first year of a new CEO’s tenure. The research results suggest that it is
important to have strong corporate governance rules to ensure regime implementation of the IFRS.

3.2. Asset Impairment as an Opportunity for Earnings Management

Companies often resort to asset impairment in a bad financial situation, which has been proven
by the negative correlation between profitability and write-off amounts in the previous section.
Consequently, earnings management attempts may be suspected. The scale of these attempts may
influence suspicions of earnings manipulation, that is, by the creation of financial reserves to transfer
Sustainability 2020, 12, 1504 9 of 24

financial results from better times to worse ones. This factor was reported quite frequently in
the research.
The management’s attempt to improve future earnings by writing off assets has been investigated
by many researchers. Among the first were Rees et al. [26]. Based on a final data sample of 277 firms,
the authors found that managers proved asset impairments when the earnings were already low in the
year when the impairment was recognised in relation to the industry median. This interpretation was
made after the adjustment of earnings for write-downs. They also tried to prove whether abnormal
accruals taken concurrently with asset write-offs are caused by attempts to manage the company’s
earnings, but the results provided in the paper may not fully explain whether management considered
that kind of earning potential. The authors mentioned that a purpose of the impairment can also be
an attempt to improve future earnings or respond to assets’ decreasing ability to generate income.
Laskaridou and Vazakidis [39] used the return on assets to measure earnings management in food
and beverage listed companies. They confirmed that companies with earning problems were more
likely to record asset impairments and then reduce their weak results. The manipulation of goodwill
impairment was shown by Alciatore et al. [45], who found that write-offs provide a value-relevant
adjustment to the earnings of gas and oil companies.
Problems arise with the correctness offs write-offs, which can be explained by inconsistent
regulations, as the reversal of losses in the US GAAPs is prohibited but required in the IFRS.
The important topic of write-off reversals was pointed out by Chen et al. [48], who reported that, if
impairment reversals are possible in the regulatory-based reporting, the quality of this information
can be negatively affected. They found evidence that Chinese companies are reversing write-offs
to avoid trading suspension or delisting due to the profitability-based regulation in their country,
which shows that the intention of the asset impairment standard does not fully cover the desirable
quality of financial reporting. Trottier [33] also confirmed that, based on 118 managers’ decisions,
they are more likely to record impairment when reversals are permitted. This result implies that
the impairment demonstration in the financial statement in the company is still subjective and there
is a poor chance of verifying managers’ decisions to record impairment. Moreover, those decisions
are unlikely to be questioned by the financial control in the particular country. André et al. [28] also
pointed out that asset impairment actually biases the financial statement negatively because of different
valuation models, managers’ subjectivism, and potential manipulations caused by the unverifiable fair
value estimates.
The following research focused, not only on the methods of earnings management disclosure caused
by asset impairment, but also on the negative conclusion and effects of impairment announcements,
such as unethical behaviour and write-off avoidance and delay. Caruso et al. [49] undertook an
empirical analysis of earning management in the context of mergers and acquisitions, and they showed
that, after the adoption of the IAS/IFRS, managers’ behaviour changed considerably. They widely
grasped the opportunity to report goodwill impairment. Moreover, the data sample limitation to 17
firms strongly limited the test, and the authors suggested that there was no earning management
practices, due to asset impairment, but there was evidence of big bath, income maximisation, and
income-smoothing cases. They assumed that financial reports cannot be considered reliable documents
of the corporate communication to stakeholders, thereby showing their weakness. Andrews [50]
pointed out that there is clearly a greater degree of big bath accounting when compared with the
pre-regulatory change period before 2005 in the United Kingdom. Bond et al. [46] provided a
comparison of the implementation of write-offs performed by managers of Australian firms before
and after IFRS adoption, and they showed that most firms with impairment indicators still do not
recognise the impairment. Avoidance of the impairment recognition was also proved by Ramanna and
Watts [23], and later with an extended sample by Filip et al. [51]. Both studies identified suspected
firms with booked goodwill and a market-to-book ratio (MTB) below one at the end of the fiscal year.
They presented a comparison of suspected firms that did not recognise impairment with firms that
carried similar goodwill and decided to report impairment in the same industry sector. Those studies
Sustainability 2020, 12, 1504 10 of 24

commented that avoidance is a strategy for managers to realise their motivation, according to their
compensation contract, reputation, and so on. Ramanna and Watts [23], by measuring SFAS 141,
provided evidence that managers avoid timely goodwill write-offs because of their interest in increasing
their compensation and protecting their reputation from the implications of an asset impairment
announcement. Conversely, Wang et al. [52] showed that managers report asset impairment if entities
have worse performance than other firms that do not recognise impairment, which may suggest that
the research results depend on the country of research. The results provided by Wang et al. [52] were
obtained in Taiwan, which is an emerging market, and the studies by Filip et al. [51] and Ramanna
and Watts [23] were conducted in the USA. According to the Ball [12] categorisation, Taiwan is in a
legal system group significantly different than USA, which also explains international differences in
financial reporting practice. Nevertheless, the results show that Common Law countries (such as the
USA), identified as investor-oriented, provide information affected by the managers’ interest. Ji [53]
showed that evidence of avoidance is strongly visible when a company’s earnings are more acutely
affected by goodwill impairment loss.
Delayed goodwill impairment charges were also shown by Majid and Lode [54], who indicated
that a decline in market capitalisation below the book value of the net asset is not a sufficient proxy for
potential goodwill impairment. The research was undertaken in the emerging market of Malaysia.
The authors argued their findings by concluding that market capitalisation cannot ideally be referred
to the net assets’ book value, as it cannot reflect the condition of the cash-generating units (CGU),
which contain goodwill, but can be used as a starting point for the investigation of potential late
reporting of goodwill impairment. Guthrie and Pang [55] examined the implication of the standard for
Australian firms, which requires assets to be grouped on the lowest level, at which the cash flows are
independent from the other groups of assets. Based on their research, goodwill impairment is more
likely to be recognised by firms with more than three cash-generating units, which may lead to the
conclusion that a higher level of asset grouping leads to a lower likelihood of the performance of asset
write-offs. Thus, the proposition of CGU asset grouping can be open to potential manipulation, as the
authors assumed that CGU aggregation still involves a lack of auditing. Incorrect CGU grouping, and
their negative impact on overall goodwill valuation, has also been pointed out by Carlin et al. [56],
Carlin et al. [57], Linnenluecke et al. [58]. Rennekamp et al. [59] proved that managers aim to maintain
a positive self-image with their decisions. Giner and Pardo [30] suggested that recording asset
impairment is caused by managers’ unethical behaviours, derived from the avoidance of earnings
surprises when they have a worse financial year than they expected. Managers want to achieve stable
earnings figures from goodwill impairment recognition in relation to the past and estimated desired
net income.
The research examined showed that there are no explicit signals confirming quality improvement
of financial statements after the adoption of required asset impairment testing. Most of the reports
signalled that the main premise of write-off announcements is earnings management. By their avoidance
or performance at appropriate times, managers try to achieve benefits for the company by creating
reserves for worse times in the future or to smooth the difference in earnings from the assumed
plan. The quality of write-offs is imposing, especially in the papers by Andrews [50] and Karampinis
and Hevas [60]. Karampinis and Hevas [60] found that the asymmetric accounting treatment of
tangible and intangible impairments increases the timeliness of goodwill impairment, but negatively
affects its reliability in future cash flow forecasts. Tangible assets are tested only in cases in which
relevant indicators of impairment exist, and intangible assets, like goodwill, are tested annually.
However, goodwill should be the first impaired asset. This treatment determines corresponding
impairments of those two types of assets. As such, the announcement of goodwill impairment will
be presented in time, but decreased. Andrews [50] indicated that, because of the many different
methodologies used by the companies to calculate value in use, there is a problem influencing the
quality of write-offs. Furthermore, there is a visible increase in the individual interpretations of the
measurement of asset impairment, which is mainly because of large variations in terminology and
Sustainability 2020, 12, 1504 11 of 24

presentation in the companies’ financial statements. Consequently, there is still a need for a debate
about the systematisation of the asset impairment recognition process and the development of a
methodological approach to the accounting measure, as well as the examination of individual elements
and their impacts on the calculation of long-lived assets’ recoverable amount.
From the shareholders’ perspective, the usefulness of the information is indicated by their
prediction power based on the financial statement. It can be measured by the correctness of signals
about the company’s future performance. Unfortunately, based on our data sample, we did not find
any optimistic reports in that scope. Hayn and Hughes [61] measured the impairment indicators
in acquisitions. They intended to understand whether investors can predict goodwill impairment
based on financial statements, and they assumed that their ability to do so is highly limited (as also
assumed by Sapkauskiene et al. [29], basically due to the quality of those statements. They also showed
that the disclosure of the impairment is mainly delayed and taken after the entity has experienced a
worse condition for a considerable period. On the other hand, some papers show that the goodwill
impairment regime better reflects the goodwill value than amortisation [62]. Reports provided by
Bostwick et al. [63] and Paugam and Ramond [64] have shown positive impact on the reliability of
companies’ information, by providing impairment information as an improvement in the future cash
flow forecasting by stakeholders.

3.3. Market Reaction to Asset Impairment

Write-off announcements should improve the quality of financial statements.
Nevertheless, investors are highly suspicious of this event and receive the information negatively,
which may be explained by their perception of write-offs as an indication of overcapitalisation.
The market reaction to earnings announcements, measured by the stock price change, was examined
by Francis et al. [34] to show the information content of earnings components during the performance
of large accounting write-offs. The research showed that investors respond negatively to inventory
write-offs. The stock prices were much higher in the quarters with no impairment announcements in
connection to prices (before write-offs) than when write-offs took place. In quarters when a write-off
was performed, the stock price radically decreased. The stock returns were systematically lower in the
case of companies performing asset impairment write-offs. In the same year, Elliott and Hanna [23]
published their paper, in which they argued that firms with multiple write-offs might experience
further reductions in their economic risk capital (ERC) because of potentially greater insecurity in the
recurring earnings level. They also made an estimation of the ERC for 2761 firms that had between 0
and 4 or more asset write-offs. A similar result was achieved by Hirschey and Richardson [65] in their
paper. It presented statistically significant negative abnormal returns due to write-off announcements.
Li et al. [66] conducted a regression analysis of investors’ reactions to asset impairment, and found that
the price impact, despite significant impairment, was lower in the data sample in the period after the
implementation of SFAS 142 than in the period before and the transition period. Thus, they proved
that impairment loss is negatively correlated with the average growth of sales and operating profits.
A negative market reaction can be explained from their perspective by the decrease in subsequent sales
and operating profits, which led directly to impairment loss. Gu and Lev [67] found that overpriced
shares lead to impairment based on cross-sectional analysis. They reported overpricing indicators,
which can predict the occurrence and magnitude of goodwill write-offs. A strong positive correlation
was shown between overpricing shares and subsequent acquisition intensity. Write-offs in the paper
are considered as a by-product of the rational use of overpriced shares to acquire overvalued targets,
and write-offs can be planned events based on the firm’s investment strategy.
Other aspects can be considered as a market perception based on the economic practice, which may
be assumed as the efficiency of adoption of the whole IFRS asset impairment tests. André et al. [28]
documented an increase in the conditional conservatism of financial reporting (i.e., the book value of
the net asset value should be related to their economic value, focusing on bad events rather than good
ones) after the mandatory IFRS adoption in Europe in 2005, especially in countries with weak audit
Sustainability 2020, 12, 1504 12 of 24

quality. Even more interestingly, for firms that reported asset impairment, the conditional conservatism
was less distinct than for the companies that did not recognise impairment in their statements.

4. Main Findings
The reviewed publications have shown the main interest areas in the asset impairment context.
Table 3 presents the main findings of the reviewed articles. In the research presented in prestigious
journals, we noticed a lack of unambiguous research results. The lack of such results may indicate
an increase in the quality of information shown in financial statements after the adoption of
asset impairment tests through more-timely information about the contemporary economic losses
(“impairments”) on long-term tangible and intangible assets [12], and more accurate value of the firm,
or at least a fraction of it, which is the aim of the fair value accounting rules [13]. On the contrary,
there are a number of reports suggesting that the management uses impairment announcements when
it is widely understood that the profitability of the business is deteriorating. Many authors reported
that presenting reliable information in financial statements is not a factor determining the preparation
of impairment tests, and that they are rather associated with the managers’ incentives to present the
financial condition of the company as expected by stakeholders. For that purpose, managers also
commonly delay the preparation of asset impairment tests. A number of reports indicated extensive
use of asset impairment for earnings management. Authors related the exploitation of write-offs
for earnings management and indicated impairment recording following the managers’ unethical
behaviour. Moreover, reports about the market reaction to asset impairment announcements were
negative. Writers noticed that the stock price decreased after write-off disclosures, and investors
reacted very suspiciously to those disclosures. The negative view was escalated by reports suggesting
that the prediction of impairment is considerably limited and may even be impossible.
As shown in Table 3, the analysed research concerned impairment tests on non-financial or total
assets, which means that measurements based on the model was used to measure the fair value of
these assets.
Scepticism related to the mark-to-model fair value accounting has been presented by a number of
authors since the beginning of its adoption. Moreover, many authors predicted problems with the
application of fair value accounting in the emerging markets, due to the lack of sufficient institutional
features that ensure proper compliance with the standards [19], as well as in countries without
common law systems. This is due to the fact that fair value accounting represents the Anglo-American
philosophy of financial reporting, which has a substantially greater propensity in recognising economic
losses in a timely manner, in contrast to financial reporting in Continental Europe and Asia [68,69].
According to Ball [12], managers in common law countries have more incentives to report losses
on time because these countries are characterised by comparatively deep markets and developed
shareholders’ rights, auditing professions, and other monitoring systems. Contrary to the common
law countries, managers whose systems are less responsive to the interests of shareholders will have to
change their habits under fair value accounting. The publications reviewed here do not allow us to
say whether in common law countries, mark-to-model fair value accounting provides significantly
better-quality information than in the other legal systems, especially in developing countries. This is
because most of the reviewed articles cover only common law countries.
Figure 4 indicates that studies covering the common law countries are not only numerically
dominant but are also ahead of time and, with one exception, do not include European developing
countries. This may be a result of the lower level of science in these countries, as well as the lower
interest of reputable journals in publishing research carried out in these countries. In Table 3, however,
we see that all the negative phenomena related to the assets’ impairment practice reported by the
reviewed articles, as disclosed in common law countries. Therefore, if the suggestions of many authors
are correct, that managers in non-common law countries are less qualified and less incentivised to
correctly apply the mark-to-model fair value accounting in practice, the quality of financial reporting
in these countries after the implementation of fair value accounting may be weak.
Sustainability 2020, 12, 1504 13 of 24

Table 3. Synthesis of the main findings.

Main Topic Factor Recognised Country Covered Type of Law Type of Assets Publications Journal
by the Study *
(1) (2) (3) (4) (5) (6) (7)
UK Com Goodwill impairment AbuGhazaleh et al. Journal of
[36] International
Financial
Management &
Factors Earnings management as the
Accounting
influencing factor influenced by the asset
Goodwill impairment Cotter et al. [35] Accounting & Finance
write-offs write-offs. Australia Com
Goodwill impairment Kabir and Rahman Journal of
[37] Contemporary
Accounting &
Economics
Slovenia Cod Fixed and current Garrod et al. [31] Journal of Business
assets Finance & Accounting
Spanish Cod Goodwill impairment Giner and Pardo [30] Journal of Business
Ethics
Canada Com Goodwill impairment Lapointe-Antunes et Canadian Journal of
al. [38] Administrative
Sciences
Greece Cod Total Assets Laskaridou and Procedia Technology
Vazakidis [39]
Total Assets Rees et al. [26] Journal of Accounting
US Com
Research
Goodwill impairment Godfrey et al. [40] Accounting and
Finance
China Asia Total Assets Yang et al. [41] Service Systems and
Service Management
Reporting of the impairment in Taiwan Asia Total Assets Wang et al. [52] International Journal
case of worse performance of Production
than other entities that are not Research
recognizing the write-offs.
Sustainability 2020, 12, 1504 14 of 24

Table 3. Cont.

Main Topic Factor Recognised Country Covered Type of Type of Assets Publications Journal
by the Study Law *
Size of the company as a US Com Non - financial assets Alciatore et al. [45] Journal of Business
determinant of asset impairment Finance & Accounting
impairment announcements Portugal Cod Tangible and Fernandes et al. [43] Review of Business
Spain Cod intangible assets Management
Germany Cod Fixed and current Szczesny and Journal of Accounting
assets Valentincic [44] and Economics
Goodwill impairment may be Europe Cod Long - lived, fixed Kvaal [42] Journal of Business
not reflected correctly using assets, goodwill. Finance & Accounting
pre-tax discounting, because of
using to small discount rate
and consequently reflecting to
small impairment.
Change in management as a UK Com Goodwill impairment AbuGhazaleh et al. Journal of International
Earnings
determinant of asset [36] Financial Management &
management
impairment announcements. Accounting
US Com Goodwill impairment Bens [25] Journal of Accounting
Research
Australia Cod Non - current assets Bond et al. [46] Accounting & Finance
impairment
Total Assets Cotter et al. [35] Accounting & Finance
Non - current assets Zhuang [27] Accounting & Finance
impairment
Taiwan Asia Total Assets Chen and Wu [32] International Journal of
Information Technology
Spanish Cod Goodwill impairment Giner and Pardo [30] Journal of Business Ethics
Canada Com Goodwill impairment Lapointe-Antunes et Canadian Journal of
al. [38] Administrative Sciences
Strong government in a UK Com Goodwill impairment AbuGhazaleh et al. Journal of International
company as a factor increasing [36] Financial Managemen&
the connection between Accounting
economic factors and asset Australia Com Goodwill impairment Kabir and Rahman Journal of Contemporary
write-offs. [37] Accounting & Economics
Sustainability 2020, 12, 1504 15 of 24

Table 3. Cont.

Main Topic Factor Recognised Country Covered Type of Type of Assets Publications Journal
by the Study Law *
Asset impairment as an Non - financial assets Alciatore et al. [45] Journal of Business
US Com
earnings management tool impairment Finance & Accounting
used to create reserves. Total Assets Rees et al. [26] Journal of Accounting
Research
Greece Cod Total Assets Laskaridou and Procedia Technology
Vazakidis [39]
Asset impairment China Asia Long lived assets Chen et al. [48] Journal of Accounting,
manipulation caused by Canada Com Trottier [33] Auditing & Finance
impairment reversals. Accounting Perspectives
Recording impairment UK Com Total Assets Andrews [50] Procedia Economics and
following managers’ unethical Irish Com Finance
behaviour. Misuse of the Italy Cod Goodwill impairment Caruso et al. [49] Journal of Intellectual
write-off opportunity. Capital
Spanish Cod Goodwill impairment Giner and Pardo [30] Journal of Business Ethics
US Com Intangible and fixed Rennekamp et al. [59] Accounting Review
assets
Avoidance and delay of asset Goodwill impairment Filip et al. [51] Journal of Business
impairment as managers’ US Com
Finance & Accounting
incentives to present the Goodwill impairment Ramanna and Watts Review of Accounting
financial condition of the [23] Studies
company expected by Australia Com Goodwill impairment Ji [53] Australian Accounting
stakeholders. Review
Malaysia Asia Goodwill impairment Majid et al. [54] Asian Social Science
Europe Cod Goodwill impairment Karampinis et al. [60] Journal of Economic
Asymmetries
CGU aggregation open for Australia Com Goodwill impairment Guthrie and Pang [55] Australian Accounting
potential manipulation due to Review
lack of auditing.
Negative investors’ response to Goodwill impairment Gu and Lev [67] Accounting Review
Market reaction asset impairment US Com Total Assets Francis et al. [34] Journal of Accounting
announcements. Research
Goodwill impairment Hirschey and Financial Analysts
Richardson [65] Journal
Sustainability 2020, 12, 1504 16 of 24

Table 3. Cont.

Main Topic Factor Recognised Country Covered Type of Type of Assets Publications Journal
by the Study Law *
Goodwill impairment Li et al. [66] Review of Accounting
Studies
Unreliable information for UK Com Total Assets Andrews [50] Procedia Economics and
stakeholders in the financial Irish Com Finance
Other aspects
statements because of the low Italy Cod Goodwill impairment Caruso et al. [49] Journal of Intellectual
quality. Capital
US Com Goodwill impairment Hayn and Hughes Journal of Accounting,
Inability to predict impairment
[61] Auditing & Finance
Estonia, Latvia Cod Goodwill impairment Sapkauskiene et al. Engineering Economics
Lithuania [29]
Impairment information as an US Com Goodwill impairment Bostwick et al. [63] Journal of Accounting,
improvement in the future cash Auditing & Finance
flows value reflection. Australia Com Goodwill impairment Chalmers et al. [62] Accounting & Finance
France Cod Total Assets Paugam and Ramond Journal of Business
[64] Finance & Accounting
An increase in the conditional Europe Cod Non - financial assets André et al. [28] Journal of Business
conservatism of financial impairment Finance & Accounting
reporting after IFRS adoption.
Record of the asset Brazil Cod Goodwill impairment Vogt et al. [47] Revista Contabilidade &
impairments is recognized in Finanças
companies with the more
conservative accounting
policies.
Increase of asset impairment Serbia Cod Non - financial assets Andrić et al. [70] Economic Annals
reporting after IFRS mandatory impairment
adoption.
* The term indicator: Com—Common Law countries, Cod—Code Law countries, Asia—Asian type countries.
presented in the reviewed publications make highly probable the fact that the requirement to
periodically review long-term tangible and intangible assets in terms of possible impairment to fair
value, in accordance with IAS 36 and IAS 38, does not contribute to the primary goals of the transition
from cost-based measures to fair value measures such as decision usefulness, better quality of
information,
Sustainability and
2020, 12,timeliness
1504 of losses. Rather, carrying out long-term asset impairment tests using
17 ofthe
24
fair value model-based approach leads to obtaining noisy fair value.

3
Asian type countries
Code Law countries
2
Common Law countries

0
1996
1998
2000
2003
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Figure 4. Chronological development of the number of scientific articles in the data sample based on
the legal system, 1996–2016.

However, this requires further research. Discretion in the interpretation of the fair value concept,
5. Discussion
and consequently their wide use and proven application, makes the issue of standard implementation
Other researchers should view the presented research results from the classical agency theory
a global, rather than local, problem [10], which indicates that there is still need to improve the standard
point of view. The principal in this case is the IASB, which emits IFRS and expects certain benefits in
covering more specific fair value calculations guidelines. In the literature review, regardless of the
return. The agents, on the other hand, are the companies that use information asymmetry and put
visible discrepancies in the legal systems, there is still a lack of a proper notion of asset impairment
their own benefits above the goals expected with the use of IFRS.
tests, which is apparent in the above-mentioned cases. Transparent regulations provided by the IASB,
IFRS implementation popularised a radically different approach to accounting reporting,
as by Financial Accounting Standards Board (FASB), do not achieve their stated objective of increasing
involving the transition from a cost- and transaction-based model to a market-value and event-based
information value for investors. We can say, then, that the results of the research presented in the
model, which resulted in the conversion of cost-based measures into a market-based measure. The
reviewed publications make highly probable the fact that the requirement to periodically review
basic premise of this transition is the assumption that accounting should measure and report basic
long-term tangible and intangible assets in terms of possible impairment to fair value, in accordance with
information required by the investors, which is the firm’s value, or at least part of it [13]. To estimate
IAS 36 and IAS 38, does not contribute to the primary goals of the transition from cost-based measures
the value of the positions that the company currently has, ‘which would be received to sell an asset or paid
to fair value measures such as decision usefulness, better quality of information, and timeliness of
to transfer a liability in an orderly transaction between market participants at the measurement date’ [17] (p
losses. Rather, carrying out long-term asset impairment tests using the fair value model-based approach
2), fair value measures are being applied. Fair value supporters, including the standard setters,
leads to obtaining noisy fair value.
believe that fair value measures are more useful for investors than cost-based measures [71,72]. So
far,Discussion
5. the study did not confirm these beliefs unambiguously. A review of the research, conducted by
Mohammadrezaei et al. [19], shows that most empirical findings demonstrate that IFRS adoption has
Otherimpact
a positive researchers
on the should
value view the presented
relevance research
of accounting resultsand
numbers from the classical
influences agency theory
the requirement to
point ofvalue
use fair view. accounting
The principal in this casewith
in accordance is thethe
IASB, whichThey
standard. emitsalso
IFRS andfindings
show expects certain benefits
that IFRS resultedin
return. The agents, on the other hand, are the companies that use information asymmetry and put
Sustainability
their 2020, 12, x;
own benefits doi: FOR
above thePEER REVIEW
goals expected with the use of IFRS. www.mdpi.com/journal/sustainability
IFRS implementation popularised a radically different approach to accounting reporting, involving
the transition from a cost- and transaction-based model to a market-value and event-based model,
which resulted in the conversion of cost-based measures into a market-based measure. The basic
premise of this transition is the assumption that accounting should measure and report basic information
required by the investors, which is the firm’s value, or at least part of it [13]. To estimate the value of the
positions that the company currently has, ‘which would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date’ [17] (p 2), fair value measures
are being applied. Fair value supporters, including the standard setters, believe that fair value measures
are more useful for investors than cost-based measures [71,72]. So far, the study did not confirm these
beliefs unambiguously. A review of the research, conducted by Mohammadrezaei et al. [19], shows that
most empirical findings demonstrate that IFRS adoption has a positive impact on the value relevance
Sustainability 2020, 12, 1504 18 of 24

of accounting numbers and influences the requirement to use fair value accounting in accordance
with the standard. They also show findings that IFRS resulted in less value relevance of accounting
numbers. The ambiguity of these findings may be the result of the different fair value measurement
levels permitted by IFRS 13 [17].
More detailed studies on the impact of fair value measures on the relevance of accounting numbers,
depending on the measurement level, are shown in the results of Song et al. [73], Bosch [74], Goh et al. [75]
and Kolev [76]. According to these authors, Level 3 (i.e., unobservable, business-generated inputs) fair
value measurement creates less relevant information than Level 1 (i.e., observable inputs from quoted
prices in active markets) and Level 2 (i.e., indirectly observable inputs from quoted prices of comparable
items in active markets, identical items in inactive markets, or other market-related information),
and depends on corporate governance. In companies characterised by low governance, it even creates
information that is not relevant to the market valuation of the company. However, these studies were
conducted for banks and financial institutions. Gassen and Schwedler [77] examined the usefulness
of fair value measures from a different perspective. They surveyed professional investors and their
advisers on the preferences regarding the various concepts of accounting measurement, showing that
the mark-to-model fair value concept is the least useful measurement concept for investors. They also
confirmed that the usefulness of the concept depends on the type of assets and liabilities. Investors
assessed the mark-to-model fair value measures as the least useful for all types of assets, except financial
assets for which they asses their usefulness as also low, but higher than value in use and historical
cost. For investors, the fair value measures are definitely the most useful concept, provided that
mark-to-market measures are used. However, when you cannot apply the mark-to-market approach,
investors prefer historical cost to all types of assets, except financial assets and inventories. This means
that for long-term tangible and intangible assets for which the mark-to-market approach cannot be
applied, investors prefer historical costs. The results of these studies are not surprising, as the concept
of fair value measures based on the model has been met with great scepticism among many researchers
from the very beginning of its application. In 2005, Ball [12] predicted problems with the FASB for fair
value accounting, especially with the mark-to-model concept. However, Warren Buffett said in 2002
that, in extreme cases, mark-to-model degenerates into mark-to-myth [76].
When discussing the results of the research presented in reviewed papers, we should ask a
fundamental question: Does fair value, based on the model, represent decision-useful information?
Seeking an answer to this question, the problem will be further analysed with the following two
supplementary questions:

1. Is financial reporting able to provide information about the company’s value, which will be
consistent with the market valuation of shares, or rather focus on reporting information showing
a large relationship with the market valuation?
2. Does the fair value concept allow the creation of information about the following positive
properties listed by Ball [12] (p. 9)?:

• ‘Accurate depiction of economic reality ...;

• Low capacity for managerial manipulation ...;
• Timeliness ...;
• Asymmetric timeliness (a form of conservatism): the more timely incorporation of bad news relative
to good news in financial statements’.

Regarding the first question, a problem arises at the stage of determining the detail of reporting.
If we assume that reporting should reflect the market value of shares as accurately as possible, then it
would be most beneficial to measure all assets together and provide one value reflecting the value of
the company. However, in accordance with IFRS 13 [17], measured assets at the fair value might be
either, a stand-alone asset or liability, a group of assets, a group of liabilities, or a group of assets and
liabilities. Thus, there is doubt as to whether the value of the entire company will correspond to the
Sustainability 2020, 12, 1504 19 of 24

sum of the values of individual assets or groups of assets. Even assuming that the market is liquid, and
prices are observable on the market, the sum of valuations of individual assets or groups will not cover
the valuation of the whole as it will not take into account the impact of portfolio diversification or
synergy. The problem is even more controversial when individual assets (groups of assets) are valued
at different levels of the fair value hierarchy in accordance with IFRS 13 [17]. Therefore, we agree with
Hitz [13], who states unequivocally that ‘fair value accounting is neither conceived nor conceptually
capable of directly measuring the value of the firm’.
In that case, what information is the most useful for investors? According to the Conceptual
Framework of Financial Reporting, the answer is the one that will allow current and potential investors
to make decisions to buy or hold on to equity, debt securities, or other forms of credit. The primary
users also need information about the resources of the entity, not only to assess future cash flow but
also to evaluate present effectivity [21]. Damant [11] (p. 30), speaking about the goals of reporting,
says that ‘The stewardship approach wishes to report what has been done. The decision making approach wishes
the company to show figures which will enable the user to forecast what will happen’. To analyse this problem,
the assets should be divided into two basic types, depending on the place where their value is created:
1. the assets, where the value is created on the market (e.g., financial assets, non-operating assets
such as land); and
2. the assets where value is created inside the company and depends on the unreported
intangible assets.
For marketable assets whereby prices are observable on the market, a fair value measure allows
you to create information that has the aforementioned features, increasing their usability for users
of financial statements. They reflect economic realities correctly, they are subject to managerial
manipulation on a small scale, and it is easy to report losses and profits on time. This is reflected in the
preferences of investors, who strongly prefer mark-to-market fair value measures for these assets [77].
On the other hand, for assets for which value is created in a company, including long-term tangible
and intangible assets, the use of mark-to-model fair value measures from the very beginning aroused
many reservations, such as: high susceptibility to manipulation because managers can influence
both the model and predicted parameters [12], lack of verifiability, and, as a consequence, lack of
reliability [13].
If we now refer to the abovementioned goals of reporting, the mark-to-model fair value measures
applied to the assets for which value is created in the company will not create useful information,
both to assess what has been done and what will happen, due to the manipulation of two distinct
types: Intentional and unintentional (e.g., behavioural biases). The scale and the type of intended
manipulation that can be expected in reporting is shown in the results of the reviewed papers. Reporting
reliable information is not a factor determining the preparation of the asset impairment tests for
managers. They use these tests to manipulate the financial situation according to the expectations of the
stakeholders, with some authors even suggesting that they encourage managers to behave unethically.
Such behaviours occurred in common law countries, where the use of fair value mark-to-model measures
did not arouse great concern among authors, due to greater motivation, tradition, and a developed
institutional background. The reviewed papers, due to the small number of publications, do not allow
unambiguous confirmation that such behaviours occurred outside common law countries, especially in
developing countries, but it is hard to expect that the situation would be better.
Another aspect relates to unintentional manipulations resulting from behavioural biases.
Behavioural finances have become a hot topic in economics in recent years. Nobel prizes have
already been won, including Daniel Kahneman in 2002, Robert Shiller in 2013, and Richard Thaler in
2017, but their achievements are rarely considered in research on the quality of financial reporting.
However, it should be noted that behavioural biases disclosed by behavioural economists will in many
places interfere with the creation of reliable information by the fair value measures based on the model,
as well as with the perception of this information by the capital market. The most typical behavioural
biases listed by Barberis and Thaler [78], that may affect the quality of reported information, include:
Sustainability 2020, 12, 1504 20 of 24

• Overconfidence, which contributes to the overstating of their competences by managers and

underestimating the risk.
• Conservatism, which contributes to the non-acceptance of information about negative changes in
the enterprise by the management board and investors, will cause a stock-price drift.
• Optimism and wishful thinking, which causes the reported plans to be based on desires, to a
greater extent than on the real chance of their implementation.
• Representativeness, which assess the risk of the stock markets in countries, which are not widely
known to investors, as bigger than by the boards or investors from the country of the stock
market itself.

Of course, this does not exhaust all the behavioural biases that can be made by both preparers of
reports and users of financial reports. On the one hand, these biases will negatively affect the reliability
of the information based on mark-to-model fair value measures and, on the other, its reception and
trust in them. It is not surprising, therefore, that mark-to-model measures were considered the least
suitable by investors [77] and, as this literature review showed, the reaction of capital markets to the
disclosure of asset impairment is negative.
To assess the future cash flow, investors also need information on the competences and actions
taken in the company. The carriers of this information are historical-cost measures, which are mostly
in direct relation to the actions taken in the company, while fair value measures focus more on
consequences. This was also reflected in the studies by Gassen and Schwedler [77], which showed that
investors do not want to give up historical cost measures, but expect this information in the notes.

6. Conclusions
We conclude that the state-of-the-art research indicates that the implementation of asset impairment
tests by the IFRS, when made by using valuation techniques from the third level of the fair value
hierarchy with high probability, will not increase the quality and reliability of the information presented
in financial statements.
The standard setters have to assume that, by allowing subjectivism in accounting, it will be
used by managers to achieve their own goals, that are not always noble and not always in line with
the objectives adopted in the standards regardless of the legal system of the country or economic
development. If only there is a possibility, the practice shows (e.g., Enron or Volkswagen) that the
temptation of manipulation will always overcome lofty reporting goals, especially when the situation
of company deteriorates. When creating standards, one should also pay more attention to a man as a
flawed being, who commits many behavioural biases affecting his activity and the results of his work
Regulation 1606/2002 of the Council of the European Union [8], which also largely contributed to
the popularisation of IFRS in non-EU countries, set many goals that, in the face of the current practice
of assets impairments presented in the reviewed publications, may not be accomplished for reasons
detailed in Table 4.
Considering the above findings, further research should focus on the question of whether the
IFRS standard has improved the degree of harmonisation of the management practice of impairment
reporting (in global accounting standards). One of the future research directions should also be to gauge
the asset impairment and influence of the IFRS on the decrease in information asymmetry. There is a
need to focus on the impact of the IFRS on the information quality presented in the financial statements
according to both the Anglo-American and Continental accounting models, with the examined research
raising the following question: What kind of information are stakeholders expecting to receive in the
financial statement?
Sustainability 2020, 12, 1504 21 of 24

Table 4. Council of the European Union’s Regulation No. 1606/2002, regarding the asset impairment practice.

Regulation Objectives Asset Impairment Practice

A true and fair view of the financial position and Non-comparable individual interpretations of
performance of an enterprise. The enhancement of the the standard caused by subjective
transparency and comparability of financial reporting. mark-to-model approach.
Efficient and cost-effective functioning of the capital market. Unreliable documentation of corporate
The protection of investors and the maintenance of communication to stakeholders because of the
confidence in the financial markets. low quality of accounting numbers and
susceptibility to manipulation.
Increasing convergence of the accounting standards currently Non-required disclosure of the methodology
used internationally with the ultimate objective of achieving used in the asset impairment calculations.
a single set of global accounting standards.
Reinforcing the freedom of movement of capital in the Market overreaction to asset impairment
internal market and helping to enable Community companies announcements. Not a reliable view of
to compete on an equal footing for financial resources. companies’ financial condition, due to the
delay in and avoidance of the impairments.

Therefore, there is also a need to conduct further research comparing the effectiveness
of Anglo-American and Continental approaches for meeting the financial market stakeholders’
expectations and, as a result, to improve the quality of the signals provided to them. On that basis,
further research will focus on the predictive power of the information included in financial statements,
according to long-term investment decisions corresponding to signalling theory. Moreover, the research
sample is limited by the methodological approach used by authors. We recognise that most of the papers
were based on regression and descriptive analyses, limiting the capabilities for further improvement of
the methods. This limitation also indicates a future research direction; that is, to improve the existing
methods or to develop new models of the factors influencing write-off measurement.

Author Contributions: Initiated the idea, T.D.; funding acquisition, T.D.; resources, J.P.; writing—original draft,
T.D. and J.P.; T.D. contributed to the idea development and the revision of this paper. All authors have read and
agreed to the published version of the manuscript.
Funding: This work was supported by the National Science Centre Poland [grant number: 2017/25/B/HS4/01374].
Conflicts of Interest: The authors declare no conflict of interest.

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