Part 2: Plant Assets Managers of publicly traded companies are under constant pr
ID: 2547269 • Letter: P
Question
Part 2: Plant Assets
Managers of publicly traded companies are under constant pressure to meet or exceed Wall Street analysts' earnings projections from stockholders and creditors, so that stock prices will increase and thus the value of stock options will be increased. Some corporate officials turn to earnings management practices in order to artificially achieve the desired results.
Answer the following question in regard to these practices:
Explain impairment losses and provide an example of how this might be used as an earnings management tool?
References: References and citations should be formatted using current APA guidelines for style and formatting.
Explanation / Answer
Impairment losses:. When any asset's FMV is less than the carrying value of asset, this shows the asset has been impaired to that extent. The difference between carrying value and FMV is considered impairment losses and must be treated according to the procedure mandated by IFRS and US GAAP.
According to the US GAAP impairment losses are amortized ina systematic way and the portion of losses are recognized in the income statement.
Reversal of impairment losses of goodwill is not allowed under US GAAP.
For other assets reversal is allowed. The reversal then is used to increase earnings but not cashflows. It is therefore used as earnings management tools in the year of recognizing losses to decrease earnings and in reversal increase earnings.