Final answer:
Recognizing an impairment of long-term assets reduces earnings quality by indicating that past earnings were overstated and casting doubts on future earnings projections.
Step-by-step explanation:
When a business recognizes an impairment of its long-term assets, it is acknowledging that the carrying value of the assets can no longer be justified by their future economic benefits. This recognition requires the business to write down the value of its assets to their recoverable amount, resulting in an immediate charge against earnings. An impairment loss, therefore, reduces earnings quality because it suggests that past earnings were overstated, as the assets were not able to generate anticipated cash flows. Furthermore, it may also indicate poor management decision-making or changes in market conditions that were not anticipated, casting doubt on the ability to forecast future earnings accurately.