Research On The Influence Of Assets Impairment Standards To Earnings Management

The impairment of assets can reflect the financial situation and the result of operation of companies, without inflating assets and profits, and to guarantee the authenticity and reliability of accounting information. But the characters of subjectivity and flexible that the assets impairment theory possesses can satisfy some companies'objects for earnings management, consequently, there will be a lot of frauds in accounting information. Excessive earnings management can not only influence the efficiency of economic resources allocation, but also will mislead the investment decisions of investors and endanger the fund safety of creditors, as a result, a reasonable and effective assets impairment standard should be carried out to control the earnings management behavior of listed companies effectively.February 15th,2006, Ministry of Finance released the Chinese accounting standards 8th-assets impairment, which has lots of changes comparing with the original accounting standards. It must greatly influence the provision and reversal of assets impairment and also restrain the earnings management behavior of listed companies. However, the listed companies are facing various circumstances, as the assets impairment standards restrain one earnings management behavior, there will be another new earnings management behavior.This paper bases on the Chinese accounting standards 8th-assets impairment, and uses normative analysis and cases analysis. Firstly, this paper analyzes the present situation of assets impairment and earnings management on the basis of the domestic and foreign status quo with the theory of the assets impairment and earnings management. Secondly, this paper selects the basic theory of assets impairment and earnings management as a starting point for research. Thirdly, this paper collects the financial data and the assets impairment data from 2007 to 2009 of all listed companies, and chooses four companies which have different earnings management motivations to analyze how much the earnings management behavior of listed companies have been restrained by assets impairment standards and the space for earnings management behavior of listed companies.The results of the research show:Firstly, listed companies are more cautious to provide assets impairment for fixed assets, construction in progress, intangible assets and other non-current assets. The circumstances that listed companies reverse assets impairment to increase profits are obviously reduced from 2007 to 2009. This confirms that the earnings management behavior of listed companies have been restrained by assets impairment standards. However, the provision for bad debts and inventories comply with other accounting standards, and some companies provide and reverse the provision of bad debts and inventories for earning management. As a result, the assets impairment standards still have some space for earnings management.Secondly, Listed companies which have the motivation of preventing loss and turning loss into gain change their ways for earnings management after the implementation of the assets impairment standards. They no longer reverse the impairment for fixed assets, intangible assets and other non-current assets, but reverse the provision for bad debts and inventories in previous accounting period.Thirdly, Listed companies which have the motivation of exaggerating loss and smoothing income change their ways for earnings management after the implementation of the assets impairment standards. They provide and reverse the provision for bad debts and inventories because once some non-current assets impairment are recognized, they cannot be reversed in subsequent accounting period.Fourthly, The assets impairment standards do not quantify the level for significant asset impairment losses. In the accounting practice, although many listed companies provide and reverse a large quantity of assets impairment, they seldom disclosure how to calculate the recoverable amount. In addition, it is difficult to calculate the recoverable amount now in China, so listed companies also have some space for earnings management. As a result, the users of accounting information cannot understand the company's financial condition and operating results accurately.Fifthly, In order to recognize and measure individual asset which can not generate cash flows independently, the listed companies should base it on asset group or asset groups. However, in the accounting practice, most of listed companies do not provide and reverse the asset impairment which based on its asset group or asset groups. This shows that it is difficult to use asset group or asset groups accurately for listed companies.Finally, on the basis of the results of the cases analysis, this paper indicates some problems of the assets impairment standards in the implementation process and proposes some suggestions on how to prevent the earnings management behavior of listed companies by improving the assets impairment standards in china.