• University of New South Wales
  • Macquarie University
  • The University of Sydney
  • University of Technology Sydney
  • Australian National University
  • The University of Melbourne
  • Capital Markets
  • Sirca
  • Commonwealth Bank
  • KPMG
  • King & Wood Mallesons
  • Macquarie
  • Australian Government - Treasury
  • New South Wales Goverment

CIFR Research Project

Effect of Regulatory Constraints and External Monitoring on Managers' Impairment decisions - E131
Assessment Round: November 2012  Completion Date: 2014
Project Summary

Accounting standards for the impairment of assets require managers to make a series of judgments and decisions when determining an asset’s recoverability, including estimating its future cash flows. It has been a concern for regulators in Australia and internationally that the various estimations required under the standards allow managers to avoid recognising the full impact of impairment losses.

This study investigates how regulatory requirements in accounting for impairment - namely, reversibility of impairment losses (possible under IFRS, but not under US accounting standards) and disclosure of impairment assumptions - influence managers’ bias in the processing of impairment information. The study also investigates the moderating role of disclosure on the reversibility of impairment losses. These issues are addressed by an experiment using managers who make impairment judgments based on the cases provided.

The findings of this project suggest that:

•    Managers’ evaluation of impairment information is not biased when impairment losses are reversible. When impairment losses are not reversible, the direction of bias depends on whether managers are required by accounting standards to make a full or partial disclosure of the impairment assumptions.
•    When managers are required to disclose all assumptions, regardless of their impairment decisions, they tend to exhibit favourable evaluation of positive information and unfavourable evaluation of negative information. However, if disclosure of assumptions is required only when impairment losses are recognized, managers are more prone to evaluate negative information favourably.

These findings suggest that the current accounting regime for impairment of assets in Australia, which allows reversibility of impairment losses, is likely to create an environment where managers will undertake a more balanced evaluation of impairment information.  Despite the significant information processing bias, the study did not find a link between information bias and managers’ decisions regarding the recognition of impairment losses.


This research will also be presented at Research Forum, Centre for Accounting and Assurance Research, UNSW Australia (November 2014) and in the US later this year.

Team Leader:
Professor Ken Trotman | Scientia Professor, School of Accounting, Business School, UNSW Australia
Dr Hwee Cheng Tan | Senior Lecturer, School of Accounting, Business School, UNSW Australia
Project Outputs:


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