Accounting theory and impairment losses   LO1, 2, 7 In an article published in the March 2015 issue of Company Director, Commissioner John Price of the Australian Securities & Investments Commission (ASIC) noted that some entities have made significant impairment write‐downs in response to ASIC inquiries. Some companies continue to use unrealistic cash flows and assumptions in estimating the recoverable amount. There have also been some instances of material mismatches between cash flows used and assets tested. Required 1. Explain how the use of subjective estimates and assumptions can affect whether an impairment loss is recognised, and the magnitude and timing of the recognition of impairment losses. 2. How can positive accounting theory be used to explain management’s preference or reluctance to recognise an impairment loss? (Hint: Positive accounting theory is discussed in chapter 2 of this text.) Your response should address:

(a) management compensation incentives

(b) debt contracting incentives

(c) political costs