This study posits that there are two main motivations for impairment reversals. First, the impaired assets have recovered so the reversal is required for the carrying amount to accurately reflect the current economic value of the assets. Second, firms reverse the previously recognized impairment losses opportunistically to increase earnings. A sample of 182 Malaysian firms that report impairment reversals during the period 2006-2009 are matched by industry and size with 182 control firms. We find that reversing firms outperform control firms in the year of the reversal suggesting that firms in Malaysia on average reverse impairments to reflect the recovery in the value of assets. In additional analysis we find that reversal reporting by Malaysian firms that are less likely to manage earnings is positively associated with future firm performance. In contrast, reporting of impairment reversal by firms with extremely high abnormal working capital accruals (an indication of earnings management) is negatively associated with future operating performance.
Keywords: Reversal of impairment losses, firm performance, financial reporting standard, abnormal working capital accruals, Malaysia
ICAS Online Proceedings Library