Empirical Study On The Impact Of Implementing Asset Impairment Standard On Earnings Management Of Listed Companies

As China's market economy continues to develop and economic environment becomes increasingly complex, in recent years, the dishonesty of earnings information in listed companies has became a social focus. The extensive existence of earnings management severely aggravated the quality of financial information. The modified earnings information is not able to fairly reveal the financial situation and operating performance, meanwhile, it makes the information less valuable in decision making and destroy the benefits of information users. Extracting asset impairment is in order to reflect the true value of the companies'assets, without inflating assets and profits, and guarantee the authenticity and reliability of accounting information. But the flexible characters that the asset impairment theory possesses can satisfy various companies' objects for earnings management, consequently, it has been one of the most important tools for listed companies to adjust the earnings. In order to change the situation, Feb. 15th,2006, Ministry of Finance released the new Chinese accounting standards system for business enterprises which included 1 Basic Standard and 38 Specific Standards. The new standard on (short for CAS8 in the following text) provides that the Impaired Assets will not be allowed to turn back once it was Confirmed, which in hope to inhibit the earnings management behaviors by listed companies using the method of extracting and reversing asset impairment to adjust earnings.The research in academic circles at home and abroad on assets impairment and earnings management has made great progress. Study results show that: listed companies have the motive to avoid losses, prevent delisting, share placements, and smooth profit, most of them achieve this by choosing accounting policy. There are a lot of listed companies both at home and abroad using assets impairment accounting policy to adjust profit, and achieve their specific purpose. However, most of the existing research is based on the former accounting system or the social background of western countries, on CAS8 is still limited. Therefore, this paper will focus on the asset impairment, test the differences of asset impairment behaviors before the implementation of CAS8 and after the implementation of the CAS8, in hope to verify whether or not the implementation of the CAS8 narrows the space of earnings management and effectively inhibits listed companies'earnings management behaviors by extracting and reversing asset impairment.Compared with the original accounting system, the new standard promulgated on 2006 further expanded the scope of the impairment of assets, and made more specific, reasonable improvements in the recognition, measurement, and report of the asset impairment. Particularly, if the impairment of long-lived assets is extracted, it may not be turned back in the following period, which is expected to control the earnings management behaviors by listed companies using asset impairment. For the concept of earnings management, accounting academic circles at present have come to no consensus. Generally, the characteristics of earnings management are declared: the main body of earnings management is the managers of the enterprises; earnings management is a long-term behavior; earnings management is a management activity with purpose and intention; the objective of earnings management is to maximize its own interests. After the theoretical analysis of the motivation to do earnings management by listed companies, and making reference to previous research, this paper presents five motivations to do earnings management by listed companies using asset impairment policy, namely: exaggerate losses motivation, prevent losses motivation, motivation to turn loss into gain, the rights offering motivation and profit smoothing motivation. And then this paper analyzes the earnings management tools of each motivation, as well as the impact of the implementation of the new standard, then proposes five assumptions.On the basis of theoretical analysis, in order to analyze the impact of the new asset impairment policy to the earnings management by listed companies, this paper proceeds empirical research, and selects 567 A-share listed companies as research objects, all of which disclosed their 2007 annual report before Mar.31st, 2008 in the Shanghai and Shenzhen stock markets.Firstly, this paper uses descriptive statistical methods, and chooses index such as asset impairment rate and asset impairment profit rate, then analyzes the overall extraction of asset impairment of all sample companies in 2005 and 2007, and the impact on the balance sheet and income statement. Draws to the following conclusions: 1.After the implementation of the new standard, the situation of extraction and reversing asset impairment has changed. The number of companies which extract asset impairment and the average extraction amount in 2007 are lager than those in 2005. Meanwhile, the number of companies which reverse asset impairment and the average reverse amount are declined than those in the 2005. 2. Extraction and reversal of the asset impairment have a greater impact on the balance sheet and income statement. Descriptive statistics show that: (1) many companies have the possibility to reverse assets impairment to increase profits, or even change loss to profit. (2) listed companies have the tendency to enlarge their assets impairment extraction amount in defective years.(3)the dates'difference between 2007 and 2005 confirms that the implementation of the new standard inhibits listed companies'earnings management behaviors by extracting and reversing asset impairment. In order to analyze the impact of implementing asset impairment on earnings management of listed companies closely, the text below uses paired T-test samples and W-test methods, based on different motivations, examines the differences between the year 2005 and 2007 on the situation of asset impairment. To filter the samples which have different earnings management motivation, this paper uses ROE, net income and asset impairment rate to divide sample interval. Then basing on the five earnings management motivations, uses paired samples T-test and Wilcoxon sign rank test methods to examine the differences between the year 2005 and 2007 on asset impairment rate of the listed companies with a certain earnings management motivation. So as to speculate the differences on the overall number of earnings management behaviors in different years, and then verify whether or not the implementation of the new standard effectively inhibits listed companies'earnings management behaviors by asset impairment policy. The test results are as follows: 1.The asset impairment extraction level of the listed companies with the motivation to exaggerate losses in 2007 is lower than their level in 2005; 2.The asset impairment extraction level of the listed companies with the motivation to prevent losses in 2007 is significantly higher than their level in 2005; 3.I don't receive reliable evidence to verify the asset impairment extraction level of the listed companies with the motivation to turn loss into gain in 2007 is higher than their level in 2005; 4.The asset impairment extraction level of the listed companies with rights offering motivation in 2007 is significantly higher than their level in 2005; 5.The asset impairment extraction level of the listed companies with profit smoothing motivation in 2007 has no significant difference with their level in 2005.Finally, combining with all the above findings, in order to narrow the space to do earnings management using asset impairment by listed companies, and to prompt listed companies to reflect their operating results truly, this paper puts forward policy recommendations on further improving accounting standards, improving enterprise performance evaluation system, perfecting the asset impairment internal control system and enhancing the quality of auditing supervision.