John A. Elliott

Write-Offs as Accounting Procedures to Manage Perceptions

In recent years material, separately disclosed loss provisions have become increasingly common elements in earnings statements. Some accountants have been concerned that these write-offs often occur significantly after the related asset impairment, tend to be disclosed late in the fiscal year, and were frequently in excess of the reduction needed to reflect the new, lower market values. Thus the FASB and the SEC are considering the need for a new standard which specifies the accounting treatment to be accorded the impairment of value of long-lived assets. One objective of this paper is to characterize recent disclosures in ways which may clarify the policy issues. A related objective is to identify relations among material loss provisions, underlying economic events, and goals of management regarding financial disclosures. In general, economic events precede accounting recognition; an event occurs and then it is disclosed. For material writeoffs, this sequence implies that assets suffer an impairment of value, management realizes that impairment, and then an accounting entry is created to record the impairment. This characterization may misrepresent the underlying event in some write-offs, especially reorganizations. Typically, reorganizations involve an accounting entry before certain

Repeated accounting write-offs and the information content of earnings

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