Patience Umah

Department of Accounting, Faculty of Business Studies

Ignatius Ajuru University of Education, Rivers State, Nigeria



This study examined the relationship between impairment of assets and capital structure of listed manufacturing companies in Nigeria. It’s focus is on how the impairment of both tangible and intangible assets impact on the capital structure of listed manufacturing companies in Nigeria. The population of the study consisted of listed manufacturing companies in Nigeria that account for impairment in their financial statements. The method adopted was based on percentages of impairment losses to either retained earnings or revaluation reserves. From the study carried out, the result showed that there is a significant relationship between impairment of assets and capital structure of listed manufacturing companies in Nigeria. The result also revealed that there is no significant relationship between impairment of assets and debt component of the capital structure. Based on the result of this study, it was recommended that companies should ensure that they regularly conduct impairment test for their assets as this significantly affect the capital structure. Also, companies should account for impairment of assets in line with the provision of IAS 36 and adequate disclosure made in respect of the impairment losses recognised in profit or loss and revaluation reserve as this significantly affects the capital structure. Furthermore, companies should also disclose any amount of impairment losses reversed into the statement of profit or loss or revaluation reserve and reasons for such reversals should be disclosed as this affect the capital structure. Accounting policy adopted by companies in accounting for impairment of assets should be disclosed and consistently applied. Finally, since impairment of assets has significant impact on capital structure, companies are to pay special attention to possible impairment indicators

Keywords; Impairment, Assets, Capital Structure, listed manufacturing companies


All entities despite their sizes are subject to the risks and uncertainties of  legal, economic and technological changes. According to Hlousek (2002), technological advancement, intense domestic and global competition, volatile interest and foreign exchange rates and rapid changes in market demand can create obsolescence of plant, machines and intellectual property and cause assets to lose some or all of their capacity to recover their costs. The asset impairment accounting system has been introduced throughout the world since the mid-1990s due global financial crises (GFC). The effect of impairment of assets on firm’s capital structure is being introduced theoretically and tested empirically. The results of impairment of assets spreads in the income statement and statement of financial position, decrease the profit and assets value and also the  borrowing capacity of firms. This accounting procedure that does not bring any cash flows and the financing choices of firms. Since the primary objective of accounting is to provide information about the economic resources of the entity, the claims to those resources and the effects of transactions, events and circumstances that changes the resources and claims; it is considered important to inform users of financial statements of any asset or cash generating unit (CGU) that lose its capacity to recover its cost. This is necessary so as to provide accounting information users with the relevant information about the value of firms resources

An asset that loses its capacity to recover cost is said to be impaired. Loren, Brazley and Jefferson (2010) state that an impaired asset is a condition in which an asset’s market value falls below its carrying amount and it is not expected to recover. It is a sudden or unexpected decline in an asset service utility. This means that an asset’s market value is less than its book value and the future cash flows to be generated from the asset are less than the net difference between market value and the book values, thereby resulting in impairment loss.

 International Accounting Standards (IAS) 36 requires that assets be carried at no more than their recoverable amount, hence entities are required to test all assets that are within the scope of IAS 36 (i.e. Property, Plant and Equipment and intangibles) for potential impairment when indicators of impairments exist or at least, annually for goodwill and intangible assets with indefinite useful lives. The controversies behind impairment testing necessitate a discussion regarding its effects on capital structure. According to Reason (2003), implementing impairment testing on an annual basis for goodwill or when necessary for capital assets can be very costly. Aside from the large monetary costs involved, impairment testing requires a great deal of time, efforts and employee attentions (Giannini, 2007).

When there is impairment loss, IAS 36 recommends that the value of the asset be written down in the books by debiting the impairment loss in statement of profit or loss or revaluation reserve and crediting the respective asset account since the asset cannot be carried at more than the recoverable amount; and impairment loss be recognised either as an expense in the statement of profit or loss account or use to reduce the balance on the revaluation reserve account on an asset that had been initially revalued. Accounting for impairment of asset provides financial statement users with the relevant accounting information for rational decision making; and it also serves as early signals of corporate collapse to management. >>>Read more>>>

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