Introduction
Before standards were introduced to regulate the impairment of assets in Saudi Arabia, companies were recording extra-ordinary losses. This loss was associated with the value of companies’ assets. According to Allexander and Christopher (2007, p. 23), jurisdictions to compare the statutory obligations of carrying assets to market values were introduced; yet, many companies did not follow them. However, the increasing asset write-downs and write-offs over the last ten years led to investigations, which revealed that the problem of earnings management was not new. This trend is widespread in companies that miss their estimates. A study by Duh, Wen-Chih and Ching-Chieh (2009, p. 113), notes that earnings management possibly explains the timing and motivation for the discretionary write-downs that have plagued the country. The researchers conclude that earnings management manipulates the positive pre and post-tax earnings to figures that are a little higher than zero to evade paying many taxes. The idea that manipulations in earnings management motivate companies to stay below the radar of tax authorities motivates the study on the problems of measurement and disclosure accounting for impairment of fixed assets.
Literature Review
Before the jurisdictions were issued, the write-downs of most companies were linked to economic factors rather than the abrupt falls and exceptional rise in pre-write off earnings (Schleicher, Hussainey & Walker 2007, p. 153). In the United States, the FASB prohibits reversing impairment losses that the company previously recognized since it gives way to earnings management behavior. Moreover, the Securities Exchange Commission is apprehensive of public companies that use restructuring and impair write-offs to manage their earnings. This shows the level of concern for companies that practice earnings management by recognizing and reversing impairments. Although the management does not make any accounting decision on earnings management, the implications of accounting choices to meet its goals are consistent with earnings management (Patel, Balic, & Bwakira 2002 p. 325).
Practical problems tend to arise when determining some value of fixed assets with no observable market prices (Naser & Nuseibeh 2003, 46). In these instances, the available information that is applicable to estimating the fair value of an asset exclusive of incurred cost is the estimations of cash flows for the financial year. Therefore, a company is free to implement its own assumptions if no information is avoided to inform of the market trends. Other participants in the markets will use different assumption, creating a disparity in markets. Studies show that sales declines during recessions have an incremental effect on asset write-downs of firms (Linsley & Shrives 2006, p. 389; Kolitz, Quinn & McAllister, 2009, p 45). Additionally firms that are financially strained are sensitively prone to business cycles.
Research aims
The main aim of this study is:
- To investigate the problems of measurement and disclosure accounting for impairment of fixed assets
Research questions
The following set of research questions will guide the present study.
- What is the role of earnings management accounting on impairment of fixed assets
- What concepts have companies employed to handle the problems associated with measurement and disclosure accounting.
- What problems of measurement and disclosure accounting for impairment of fixed assets are specific for Saudi Arabia?
- What factors influence Saudi managers to adopt the questionable management accounting practices?
- What factors are significant to the management accounting practices that Saudi companies adopt?
Methodology
To carry out this research, the researcher will collect data from the annual consolidated financial reports of non-financial companies in Saudi Arabia. The researcher will choose a specific period to analyze data from the companies. The researcher will collect the reports from the company websites and use them to answer the objectives of the paper. The consolidated reports are selected and data collected from notes, income statements, and balance sheets. Kothari, Li, and Short (2009, p. 1639) state that the financial statement that provides information about impairment, especially the accounting policies associated with impairments and remaining disclosures are notes. The researcher will consult income statements for evidence of impairments or reversals and crosschecking with amounts in the notes. Kothari, Li, and Short (2009, p. 1639) assert that balance sheets only provide information about the assets to allow cross-comparison. The researcher will also read the management reports to find evidence of impairments. The researcher will compile data into excel to build up qualitative data on the annual and accumulated impairment losses and reversal as well as disclosures about impairment.
Sample and data
The researcher will employ exclusionary criteria to give an accurate sample of the population study, considering the bulk nature of data. The study will exclude foreign companies, financial companies, and companies with no consolidated accounts companies, which are listed in the Tawadul. The researcher excludes foreign companies to have only Saudi companies. Next, the researcher excludes financial companies because impairments are expected in their reporting of investments and client debts (Hodgdon, Tondkar, Harless, & Adhikari 2008, p. 6). The final sample will be the recommended sample for this study. In sum, the representative nature of companies in the Tawadul makes a strong case for this study.
Data Processing and analysis
The collected secondary data will be tabulated in excel to investigate the problems of measurement and disclosure accounting for impairment of fixed assets. The researcher will display the collected data using descriptive statistics on graphs, tables, and pie charts.
Significance of the study
Research on the problems of measurement and disclosure accounting for impairment of fixed assets is skewed for the Saudi context. Few literatures focus on the trends in accounting practices in the region and since the country is transitional, research that could be replicated across the region is needed. Bulk literature focus more on developed economies and give little thought to the Middle Eastern region (Naser & Nuseibeh 2003, p. 31). Therefore, this study will lay the foundation for future studies on the problems of measurement and disclosure accounting for impairment of fixed assets. Businesswise, this paper will inform researchers of industry wide practices in the region, as they have a bearing on the financial health of companies. In the academic context, the present study informs academic of the trends in problems associated with measurement and disclosure accounting for impairment of fixed assets and their prevalence in academia.
Timetable for the proposal
The following is the timeline for the proposal.
Resource requirements
This research requires adequate time to analyze the resources after compilation. Moreover, the help of a financial analyst is required to help in identifying the trends in measurement and disclosure accounting for impairment of fixed assets for the Saudi region. The bulk nature of the project will strain the resources, pushing the researcher to look for additional sources of funds. Sights are set on the school budget and grant committee. Next, researcher will collect data for use in this study through company websites and from the school library. Most Saudi firms embrace information technology, making it easy to retrieve the necessary financial information.
Conclusion
It is possible to conclude that the research on Saudi listed companies will yield the required data through the financial instruments. The disclosure of information in reports deserves scrutiny, for impairments and disclosures, because of their value to the financial health of the company and their impact on investor choices. Companies need to comply with the standards of proving information appropriately, if they are to communicate a universal language in their reports. This paper adds to a depth of literatures on fixed assets, their disclosures, and impairment. Other researchers may use this research to offer a new perspective into the use of financial instruments to understand the subject better.
References
Allexander, D, & Christopher, N 2007, Financial Accounting an international introduction, New Jersey, US, Prentice Hall.
Duh, R, Wen-Chih, L, & Ching-Chieh, L, 2009, Reversing an impairment loss and earnings management: The role of corporate governance. The International Journal of Accounting, vol. 44, pp. 113-137.
Hodgdon, C, Tondkar, R, Harless, W, & Adhikari, A 2008, Compliance with IFRS disclosure requirements and individual analysts’ forecast errors. Journal of International Accounting, Auditing and Taxation vol. 17, no. 1, pp. 1-13.
Kolitz, D, Quinn, A, & McAllister, G 2009, Concepts-Based Introduction to Financial Accounting, South Africa, Juta and Company Ltd.
Kothari, S, Li, X, & Short, J 2009, The effect of disclosures by management, analysts, and business press on cost of capital, return volatility, and analyst forecasts: a study using content analysis. The Accounting Review, vol. 84, no. 5, pp. 1639-1670.
Lambert, R, Leuz, C, & Verrecchia, R 2007, Accounting information, disclosure, and the cost of capital. Journal of Accounting Research, vol. 45, no. 2, pp. 385–420.
Linsley, M, & Shrives, P 2006, Risk reporting: a study of risk disclosures in the annual reports of UK companies. The British Accounting Review, vol. 38, no. 4, pp. 387-404
Naser, K, & Nuseibeh, R 2003. Quality of financial reporting: evidence from the listed Saudi nonfinancial companies. The International Journal of Accounting, vol. 38, no. 1, pp. 41-69.
Patel, S. A, Balic, A, & Bwakira, L 2002, Measuring transparency and disclosure at firm-level in emerging markets. Emerging Markets Review, vol. 3, no. 4, pp. 325- 337
Schleicher, T, Hussainey, K, & Walker, M 2007, Loss firms’ annual report narratives and share price anticipation of earnings. The British Accounting Review 39, vol. 2, pp. 153-171.