A few years ago Kellogg, a maker of cereals and foods, hit its targeted earnings-per-share growth of 11 percent, and its stock price was up 25 percent. In the fourth quarter of that year, the company took a significant “one-time” charge against earnings when it wrote down assets-mostly property, plant, and equipment-from its overseas operations. Interestingly, this write-down was the ninth such charge in the past eleven quarters. Some analysts believe that Kellogg was using these charges to mange earnings and estimated that the company’s earnings should actually have been 24 percent below the previous year.
REQUIRED:
a. Describe how Kellogg could use asset write-downs to mange earnings.
b. Explain why auditors may be less inclined to object to subjective asset write-downs compared to asset overstatements.
c. What is the FASB’s position on asset impairments?