| Accountants examine multiple indicators when assessing whether individual assets are impaired. Different indicators predict cash flows over varying time horizons, and their importance varies depending on how far into the future individual assets are expected to generate cash flows. We argue that earnings exhibits asymmetric timeliness with respect to multiple signals, including stock returns, sales changes, and operating cash flow changes, which differentially explain write-downs of current assets, long-lived tangible assets, and infinite-lived goodwill. We argue that these multiple indicators can confirm or contradict each other, and predict an interaction effect of multiple signals. Empirical estimates for U.S. firms confirm these predictions, and yield important new insights about the effects of multiple signals for both conservatism and impairment research. We investigate optimal cutoffs for bad news, and document a "loose" impairment trigger requiring extreme bad news, whose level varies across both signals and asset types. |
Updated 03/19/2014