A Comparative Study On The Earnings Management In Loss-making Listed Companies: Based On The Implementation Of The "Accounting Standards For Enterprises No.8 -Impairment Of Assets"

On February 15th 2006, The Ministry of Finance announced the "Accounting Standards for Enterprises No.8 - Impairment of Assets" (CAS8) which would be put into effect in the listed companies on January 1st 2007. The CAS8 is a major innovation, which demands that company can't reverse long-lived asset impairment in the subsequent accounting period once the impairment is recognized. The main purpose of this amendment is to reduce the earnings management using long-lived asset impairment, so that long-lived asset impairment can reflect its economic substance better. However, the short-lived asset impairment is not in the list of restrictions, namely, the short-lived asset impairment can still be reversed. This would give company an opportunity to manage earnings by short-lived asset impairment.Today, the CAS8 has been implemented in listed companies 4 years. In order to explore the implementation of the CAS8, this paper makes an empirical study on the extent of earnings management about the depreciation of asset value drawn from loss-making listed companies. Three conclusions are obtained.First, before the implementation of the CAS8, obvious earnings management existed in loss-making listed companies through the provision for asset impairments. Second, earnings management in loss-making listed companies through the provision for long-lived asset impairments has been controlled by a certain degree after the implementation of the CAS8, and the new policy can reduce earnings management before implemented. But the CAS8 controls earnings management only in a short time, which about two or three years. Third, the extent of earnings management in loss-making listed companies through the provision for short-lived asset impairments has been controlled by a certain degree after the implementation of the CAS8, too. However, the implementation of the CAS8 has been diluted somewhat with the passage of time. This paper confirms the inference that the short-lived asset impairments will be favored by earnings management by some researchers.