Asset impairment accounting and appraisers: evidence from Japan.

ABSTRACT

The asset impairment accounting system has been introduced throughout the world since the mid-1990s. Even in Japan it has been extensively introduced since 2006. This article clarifies the characteristics of companies that used asset impairment accounting and the actual conditions of appraisers' involvement. The analysis shows that companies with high land-impairment ratios are conspicuously likely to select an appraiser's valuation. Appraisers' participation in asset impairment accounting restricts directors' discretionary behavior and suggests the possibility of increasing financial reports' reliability.

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Japan experienced a sudden rise and then decline in real estate prices from the late 1980s to the 1990s. As a result, companies that acquired large amounts of real estate when the prices were rising ended up suffering tremendous latent losses. Asset impairment accounting, which recently has been introduced in Japan, has exposed these losses. Today, asset impairment accounting contributes to presentation of the stark contrast between companies that have effectively utilized their corporate real estate and those that have not. This revelation has changed company directors' views of corporate real estate and has created new areas of operations for appraisers, who have greatly contributed to the process of asset impairment accounting. This article presents empirical analyses of companies that have adopted asset impairment accounting and attempts to verify appraisers' roles and contributions.

History

The Financial Accounting Standards Board (FASB) released Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, in the United States in 1995. (1) The International Accounting Standards Committee released International Accounting Standards (IAS) No. 36, Impairment of Assets in 1998. (2) Thus, asset impairment accounting has been a global issue since the mid-1990s.

Asset impairment accounting was born in the United States because the reliability of financial reports had deteriorated due to directors who haphazardly and discretionarily devalued fixed assets. (3) This discretionary devaluation of fixed assets affected the reliability of earnings, seriously influencing investors' decisions. (4) Consequently, asset impairment accounting was introduced to promote procedural accounting rules and to curb directors' accounting indiscretions.