IMPAIRMENT OF ASSETS

Impairment of Assets

Impairment of Assets

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Companies with substantial intangible assets may find themselves under the impairment disclosure spotlight - and facing significant charges - as the financial crisis continues.

The UK's Financial Reporting Review Panel intends to review impairment disclosures in 2008 accounts and will give advance notice to a number of listed companies that their accounts will be subject to review. It is uncommon for the panel to do this, but it claims that 'these are unusual times'. The aim of IAS 36, Impairment of Assets, is to ensure that assets are carried at no more than their recoverable amount.

If an asset's carrying value exceeds the amount that could be received through use or selling the asset, then the asset is impaired and the standard requires a company to make provision for the impairment loss. An impairment loss is the amount by which the carrying amount of an asset or cash-generating unit (CGU) exceeds its recoverable amount. The recoverable amount of an asset or a CGU is the higher of its fair value less costs to sell and its value in use. (Alexander et.el, 2009, 187-188)

IAS 36 also outlines the situations in which a company can reverse an impairment loss. Certain assets are not covered by the standard and these are generally those assets dealt with by other standards, for example, financial assets dealt with under IAS 36.

In this regard, it is noted, for example, that some international accounting standards permit a choice between different measurement bases (e.g. IAS 36 - Impairment Assets), but other standards do not permit such a choice.

The introduction of a full fair value system for all financial instruments has been a long-term ambition of the International Accounting Standards Board (IASB) and some national accounting standard setters. Nevertheless, it would seem, rightly or wrongly, that fair value accounting is becoming more pervasive and its impact remains contentious (Danbolt and Rees, 2008, 271-303).

This study has two main objectives: the first objective is to investigate whether earnings of the Jordanian shareholding insurance companies using fair value accounting for financial instruments and investment property are more volatile than earnings of those companies using historical cost accounting. The second objective is to assess the risk relevance of different measures of income volatility by examining whether or not stock returns of the Jordanian shareholding insurance companies reflect more economic risk associated with their fair value income compared with historical cost income. Addressing these objectives calls for building four income measures as follows:

1.Net income excluding unrealized fair value gains/losses on held-for-trading financial assets (henceforth NIeHT).

2.Reported net income (henceforth NI).

3.Net income including unrecognized fair value gains/losses on investment property (henceforth NIiIP).

4.Net income including unrealized fair value gains/losses on available-for-sale financial assets (henceforth NIiAS). (Owusu-Ansah & Yeoh, 2006, 228-255)

Theoretical Background And Literature Review

The academic research relating to fair values looks at “value relevance” and “risk relevance” of fair values. The first stream of research examines the value relevance of FVGL and fair value level estimates, while the second stream of research relates to the ...