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The increasing number of asset writedowns and writeoffs during the last decade has captured the attention of both the financial press and the standard setting community. The FASB is currently considering regulation of writedowns of impaired assets and identifiable intangibles and released a Discussion Memorandum on the issues surrounding the problem in December 1990.(1) Presently, there is little empirical research which applies directly to the writedowns which might be covered by the resulting standards (discretionary writedowns).
Before any regulation by the FASB is attempted in this area, it would be beneficial for both standard setters and the business community to learn about those companies who have already chosen to record discretionary writedowns and the situations which may have prompted them to do so. Previous research in this area is not conclusive since some is based on anecdotal evidence and most of the published studies of writedowns include not only discretionary writedowns of impaired assets, but also writeoffs and writedowns which may qualify as discontinued operations under APB 30.
The purpose of this paper is to fill this void in the literature by providing information focusing only on discretionary asset writedowns. In particular, the following areas will be explored:
1. What types of firms are recording discretionary asset writedowns? How prevalent are these events?
2. How are discretionary asset writedowns disclosed?
3. When are discretionary asset writedowns recorded? Are there any timing patterns in these events?
4. What are the consequences of these writedowns? How do they affect stock prices and the financial health of the firms?
THE CURRENT ENVIRONMENT
An asset is said to be "impaired" when its book value exceeds some measure of its "fair" value. When a firm recognizes this impairment and subsequently records the effect by decreasing the book value of the asset and debiting an income statement account, the firm has recorded a "writedown." GAAP clearly allows these writedowns in several situations. First, certain current assets, such as marketable securities and inventories, are examined periodically and adjusted to the lower of cost or market. Similarly, long term equity investments are adjusted periodically to the lower of cost or market although the income statement is not affected by the writedown. Finally, any long term assets for which disposal is contemplated (including assets...