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Optimal impairment rules


Göx, Robert; Wagenhofer, Alfred (2009). Optimal impairment rules. Journal of Accounting and Economics, 48(1):2-16.

Abstract

We study the optimal accounting policy of a financially constrained firm that pledges assets to raise debt capital for financing a risky project. The accounting system provides information about the value of the collateral. Absent accounting regulation, the optimal accounting system is conditionally conservative: it recognizes an impairment loss if the asset value is below a certain threshold, but never reports unrealized gains. We describe the optimal impairment rule and the optimal precision of the accounting information, and we provide comparative static results that lead to testable predictions on the determinants of impairment rules.

Abstract

We study the optimal accounting policy of a financially constrained firm that pledges assets to raise debt capital for financing a risky project. The accounting system provides information about the value of the collateral. Absent accounting regulation, the optimal accounting system is conditionally conservative: it recognizes an impairment loss if the asset value is below a certain threshold, but never reports unrealized gains. We describe the optimal impairment rule and the optimal precision of the accounting information, and we provide comparative static results that lead to testable predictions on the determinants of impairment rules.

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Citations

37 citations in Web of Science®
28 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:2009
Deposited On:27 Jun 2013 11:12
Last Modified:05 Apr 2016 16:50
Publisher:Elsevier
ISSN:0165-4101
Publisher DOI:https://doi.org/10.1016/j.jacceco.2009.04.004
Other Identification Number:merlin-id:8224

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