Earnings Management By Life Insurance Company Under The Financial Instruments Accounting Standards Of CAS

The modern theory of firm considers a firm as a nexus of contracts. Due to the broad existence of information asymmetry and uncertainty, contracts are incomplete. The struggle against the content of the accounting information disclosures between different beneficiaries leads to the emergence and perfection of accounting standards eventually. However, due to the limitation of the technology and the model of accounting standards setting, accounting standards cannot eliminate earnings management, and even cause earnings management under certain circumstances.On 15th February 2006, the Ministry of Finance of the People's Republic of China issued 39 accounting standards for business enterprises, which became effective for the listed companies from 1st January 2007. The issuing of CAS22, CAS23, CAS24 and CAS38 (called "Financial Instruments Accounting Standards" in following text) is an important change than the previous regulations. As the Financial Instruments Accounting Standards is principle-oriented and require more professional judgments on financial instruments classification, fair value measurement and impairment test, they may provide opportunities to enterprise for earnings management.In this paper, to provide a basic theoretical support for further discussion, the motive of topic selection will be introduced and a review of literature on Earnings Management and Financial Instruments Accounting Standards will be provided firstly. Then, based on the life insurance companies' business model, typical asset structure and solvency index, the importance that financial assets accounting means to life insurance companies will be explained. Then, by using comparative analysis method, main contents of the Financial Instruments Accounting Standards and their effects on the disclosure and presentation of life insurance companies' financial state, profit and solvency will be analyzed. Furthermore, with deep research on policies of financial assets classification, fair value measurement and impairment test, the possibilities that life insurance company may use the Financial Instruments Standards to make earnings management will be discussed. Finally, Suggestions for Carrying out Financial Instruments Accounting Standards will be provided.Insurance contributes in economic compensation, financing and social management. It's a basic tool for risk control under market economy and is an important element of the financial and social welfare system. With the publication of "Several proposals on the development and the reform of the insurance industry" by the State Council In June 2006, and the successful A-share IPO of China Life and Ping Ah Insurance Company in early 2007, domestic insurance industry is facing a great opportunity for development and relevant supervision is becoming more and more challengeable. On one hand, accounting plays a significant role in the financial market supervision. On the other hand, as more and more life insurance companies are listed in A-share market, investors will pay increasing attention to life insurance companies' financial statements. All of these require urgent research on life insurance companies' accounting problem. On the background, this research is meaningful to investors, creditors and regulators of the insurance companies.