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1. Introduction
The reversal of an impairment of a non-current asset under International Accounting Standard (IAS) 36 is an aspect of fair value accounting that has the effect of increasing current earnings. This study begins by testing if the Malaysian version of IAS 36, Financial Reporting Standard (FRS) 136, is generally applied in an unbiased fashion or if it is used to opportunistically increase earnings. While FRS 136, a standard based on fair value accounting, is an improvement in terms of the relevance and timeliness of accounting information relative to the historical cost approach, it also provides managers with opportunities to manage earnings. Such earnings management may cause the reversals not to be a faithful representation of the recovery of the asset values.
It should be noted that the reversal of an impairment charge under IAS 36 is one of the major differences between the two major accounting standard setting bodies in the world: the IASB and the Financial Accounting Standards Board (FASB). Thus, there is no universal agreement on the best way to treat assets which have been impaired and are reckoned to have recovered some or all of their value. FASB prohibit the reversal of an impairment charge made against non-current assets on the grounds that an impaired asset is on a new cost basis. Duh et al. (2009) is the only paper that studies the reversal of impairments under IAS 36. They report evidence that companies in Taiwan that have made larger impairments, use the reversal of such impairments to boost current earnings when the earnings are below the benchmark of the prior year’s earnings, and conclude that the FASB approach is justified. The current paper takes a closer look at the reversal of impairments with a view to providing additional evidence surrounding this question. In addition, the excellent disclosure practices by the vast majority of Malaysian companies with respect to accumulated impairment charges allows us to examine the relation between impairment reversals and prior big baths far more closely. Noting that a prior big bath is an indication of historical earnings management, we further extend Duh et al.’s (2009) analysis by examining the relation between current earnings management, proxied by abnormal working capital accruals (AWCA) and impairment reversals. Firms with...