Should asset impairments be included in earnings when evaluating stewardship by management?

Abstract

Purpose This paper aims to consider the relevance of asset impairments when evaluating stewardship by management. Design/methodology/approach This paper considers association of earnings (including and excluding asset impairments) with contemporaneous stock returns which are used as a measure of management performance and demonstration of stewardship. Findings Evidence is provided of earnings including asset impairments (an accounting measure of current measure firm performance) having a higher explanatory power for contemporaneous stock returns (an objective evaluation of current period firm performance) than earnings exclusive of asset impairments. Consistent with this, recognized asset impairments are significantly associated with contemporaneous stock returns. These results occur across firm years generally, as well as for firm years exhibiting indicators of impairment and firm years recognizing asset impairments. Research limitations/implications This paper adds to the literature providing evidence of asset impairments not being recognised on a timely basis. Additionally, challenges are identified in evaluating the relevance of accounting information for so-called growth firms. Practical implications These findings support continued recognition of asset impairments in the Statement of Profit or Loss if stewardship is accepted as an objective for financial reporting. It also suggests issues with the recognition of asset impairments that might be addressed by enhanced disclosure. Originality/value This paper is distinctive in that it considers the relevance of accounting information for evaluating stewardship, as distinct from decision-making. It also considers alternate measure of performance (earnings including and excluding asset impairments) for all firms rather than only those disclosing an alternate measure (i.e. a fair horse race)