The Economic Consequences Of Asset Impairment

China Accounting Standards established in 2001 enlarged the categories of assets which are required to report the reserves. That is, four kinds of assets changed to eight kinds of assets which should do impairment test and report the reserves. The aims of this change were to improve the quality of assets, reduce the potential risk of operation, stabilize the continuing operation of companies and increase the value relevance of accounting information. However, did all these objectives come true? Zhao(2006) found that the regulation of impairing eight kinds of assets supply the opportunity of earnings management for managers in listed companies. There were phenomenon that some listed companies manipulated profit by choosing the timing and amount of impairment and reverse of reserve. For specific cases, there were KELONG Appliance, SICHUAN CHANGHONG, SOUTHERN SECURITIES and so on, which managed earnings using reserves.Under this background, the treasury department reestablished the provision of asset reserve in 2006, put forward the requirement of impairment evidence, cancel the reverse of asset reserve and require the reserve unit as asset group and so on. The aims this time are to reflect the quality of asset in true, and at the same time, decrease the space for listed companies to perform earnings management.On the other side, the new financial report system includes four statements and one notes by following the international regulations. That is, to cancel all the subsidiary statements such as statement of asset reserve. Will the cancel reduce the information content of financial report? What are the effects of these changes about asset reserve?Under the background I mentioned above, the aims of the dissertation have three directions: what's the reason of changing the regulations of asset impairment in 2006? Is that because the bad consequences of related regulations in 2001? Therefore, firstly I'd like to test the implement of accounting standards in 2001, based on the results of other literature. Secondly, I'd like to testify the effect of accounting standards in 2006, whether the new regulations make up the shortcoming of old one? Lastly, I'd like to testify the relationship between disclosure and information contents of financial statements.Firstly, chapter one to chapter two of the article base on related literature, analyze the related definitions about asset impairment, the recognition and measurement of asset impairment, introduce the process of asset impairment accounting and relate some similar theories with the model of asset impairment, such as accrual-basis accounting, conservatism, disclosure way of accounting information and earnings management.Chapter three and chapter four are explanations of first research objective, test the effect of implement of accounting standards in 2001, whether there are phenomena to make use of asset impairment to doing earnings management in listed companies during 2001 to 2006.Chapter three, generalizes the classic cases using impairment to perform earnings management, describes the detailed information about impairment of eight assets. Firstly, introduce the process the impairment accounting and put forward the limitation of the impairment accounting. Secondly, compare the regulations in old accounting standards and new ones, then, we focus the detailed information during 2001-2006, as only this period has the information about subsidiary information about asset impairment. Lastly, generalize the significant cases about how to make use of impairment to perform earnings management, which testify the consequences of old asset impairment regulations.Chapter four testifies the relationship between the reserves on intangible asset and earnings management. Much literature shows that there are significant relationship between asset impairment and earnings management. However, only a few papers are focus on impairment of intangible asset. As the characteristics of intangible asset, it's necessary to do some research on impairment of intangible asset, which is another angle to testify the consequences of old asset impairment regulations. The chapter compares the net income after the reserves on intangible and the net income before the reserves on intangible asset, figures out whether there is earnings management by comparing the distribution of two kinds of net income. The chapter also lists the public companies whose reserves on intangible are more than net income.Chapter five supplies the evidences for second research objective, that is, the effect of implement of the new standards about asset impairment. The chapter is just to testify whether the changes of provision of asset reserve reduce the space of earning management for public companies. I regard the data from 2001 to 2006 as samples of old standards, and take the data in 2007 as a proxy for new standards as the new standard s established in 2006 were put into force in 2007. Then I compare the samples between old standards and new ones and find out that new standards decrease the relationship between the asset reserve and earning management. And the new samples show more relevant between the accounting information and future performance of companies.Chapter six is to test the third research objective. The chapter tests the effect of changing the disclosure of asset reserve, I compare the general information of asset reserve and subsidiary information of eight asset reserve and find out that the subsidiary information has more information content than general information and the different asset reserve information has different information content, which can not be neglected. Therefore, I advise that canceling the statement of eight asset reserves will reduce the information content of financial report.The last chapter puts forward some suggestions for accounting standards setters.The paper has three innovations:1. Focus on the subsidiary information of asset impairment. Because there are no detailed information in other countries except China, the paper has the advantage to do research on the unique data to make up for the blank of accounting research in other countries. And we also find the different information that different subsidiary take.2. Testify the relationship between the disclosure method and earnings management.Seldom is the paper studied on disclosure method and earnings management. And the paper first does researching in this field and finds the significant results of changing the disclosure method.3. Decompose the asset impairment into normal impairment and unexpected impairment.The dissertation decomposes the asset impairment into normal impairment and unexpected impairment based on the previous research on discretionary accruals and undiscretionary accruals. By decomposing, the results are more accurate.