Research On The Disclosure Of Infrequent Earnings Under New Accounting Standards

In February 2006, the Ministry of Finance announced the new accounting standards that are substantially in compliance with international accounting standards. Under the framework of the new accounting standards, enterprise financial reports embrace the modern performance reporting principles such as "the perspective of balance sheet" and "the perspective of comprehensive income. This makes enterprises' earnings components more complicate, lower the forecasting ability and decision usefulness of aggregated earnings number. On the perspective of investors' decision usefulness, this paper, adopting both normative and positive research methods, examines the main shortcomings of China's compulsory disclosure policy in regards to infrequent earnings, undertakes research on the earnings classification and reporting, provides and explains the empirical evidences regarding decision usefulness of infrequent earnings information to investors. The main research work and brief conclusions are as follows:1, This paper analyzes the shortcomings of infrequent earnings (IE) disclosure policies followed by the listed companies. IE has unavoidable shortcomings in respect of its "understandability", "completeness", and "representational faithfulness". These problems concerning accounting information quality shall certainly affect its decision usefulness to investors.2, This paper comprehensively reviews the historical evolvements of enterprises' performance reporting framework, discusses the basic concepts and theoretical basis underlying enterprise's performance reporting. Reporting enterprise comprehensive income is the necessary result for corporate financial reports to adjust to the change of entities' economic conditions and to fulfill investors' information needs. The basic principle underlying reporting comprehensive income is that all earnings components and other types of financial information are of equal importance to assess entity's performance. Hence, financial reporting should insist on the principle of equal prominence. The classification of earnings items should avoid causing investors have the impression that part of earnings items should be exclude from the aggregate earnings amount.The above-mentioned research results indicate that regulatory body should pay attention to the possibility that listed companies use IE information to mislead investors. The standards used to classify earnings items should possess the quality of objectivity in order that the discretionary of listed companies' management are reduced to its outmost.3, So far as definition and principles of earnings components classification are concerned, the research results and conclusions reached by International Accounting Standards Board and the Federal Accounting Standards Board are systematically reviewed and analyzed. The paper also conducts research on and streamlines the application of dual classification standards for earnings components in the framework of new accounting standards. The research results can help investors to classify earnings components into the following categories: earnings components arisen as a result of re-measurement of assets and liabilities, earnings from discontinued operations and financial earnings. In essence, it helps investors to correctly categorize persistent 'core earnings' and value-irrelevant transitory earnings among current earnings components.4, Using accounting data disclosed by listed companies and stock market price information, this paper conduct fully empirical tests on accounting information quality and decision usefulness of IE information. It obtains the following main findings: (1) IE possesses the nature of transitory earnings. But its transitory nature is not reflected in the share price. There is mispricing of IE in the stock market. (2) Comparing two different kinds of performance measures, accounting earnings number is more value relevant than earnings number after IE.The testing results indicate that investors still more rely on the accounting earnings measures to make stock pricing decisions. Investors "fixate" on accounting earnings so that they cannot realize that IE is transitory and unsustainable, and cannot appreciate its true implications to share value either. The disclosure of IE information fails to fulfill its function of alerting investors about enterprises' persistent earnings. The testing results also suggest that the accounting quality problems regarding "understandability" and "reliability" of IE information may cause investors loss confidence to it, and further cause IE information be unable to have its decision usefulness. This paper makes contributions to the literature on earnings classification and disclosure in the following two dimensions:1, conducts fully empirical testing about the market consequences of IE disclosures, and provide empirical evidences for evaluating the usefulness of IE disclosure. The testing results, the analysis and explanation to the empirical findings are of a great help for understanding the pricing effects of IE information to investors.2, systematically analyzes and evaluates the change and evolvement process of IE information disclosure regulations adopted by internationally prominent accounting standards bodies reviews and summarizes the concepts of earnings elements relating to enterprises' performance reporting, the contents and formats of performance reporting, related theories and principles about classification and aggregation of earnings components; proposes a model for classifying, aggregating and analyzing comprehensive earnings components in the framework of new accounting standards. These researches provide theoretical support to improve enterprises' performance reporting for our country, enlarges the angle of researching on enterprises' financial information disclosure, and also increase the research contents of accounting theory in our country.