Directly Managing Earnings by Deviating from Clear-Cut Property, Plant and Equipment (PPE) Impairment Rules

Mapping reported PPE impairment amounts (i.e. write-downs and reversals) to only valid directions in legitimate triggers specified under benchmark impairment rules (IAS 36 and SFAS #144), I investigate whether managers’ impairment decisions are justified. Finding evidence of nonconformity to rules, I quantify this as ORAI (i.e. opportunistic reporting of asset impairment) and document that target beating, smoothing, small profits, and other managerial intents drive ORAI while governance mechanisms mitigate it. I find evidence of ‘earnings management (EM) planning’ in jurisdictions allowing both write-downs and reversals such that the write-down tool achieves downward EM in period t but is followed in future periods by upward EM achieved via the reversal tool. I consider this as incremental contribution to literature, but a more novel contribution which this study brings is the linking of managers’ reversals decisions to impairment rules to detect impairment rules deviators.