A Study On Earnings Management Of Listed Companies Under Fair Value Measurement

With the development of economy,historical cost accounting method cannot fulfill the requirement of accounting information users. Under this economic background,the Ministry of Finance issued new accounting principles on.Feb.15th,2006.The key feature of this new Principle is the reintroducing of fair value accounting method .The using of fair value accounting involved fierce discussion in both of the theoretical and the practical fields. Advocates agree that fair value accounting add the information content to financial report ;opponents agree that fair value add the fluctuation of net income and enlarge the room for earning manipulation. Until now,there is few literature focus on the relationship between fair value and earning management,for the reason of lack of date, most of which stays at the theoretical stages. The research about the fair value didn't start until in 90s of 20thcentury, and was first applied in the debt recombination and non-monetary transaction criteria in 1998.But due to the immaturity of production element market, the lack of active market and the inadequate supervised mechanism, the fair value is difficult to obtain, resulting in the big random in application of these accounting criteria. With the application of the fair value in the debt recombination, non-monetary transaction and investment criterion, it has come to utilize the fair value to control profit by companies. So there was no choice but stop the utilization of it, but the research of it has been insisted on in China. Whose range is magnified compared with that in 1998.On such background, this paper aims to study the influence of the utilization of the fair value in the new accounting standards in order to offer some references to its better application in more fields in the future and do good to exploit better the new standards. The new accounting standards will influence the listed company's earnings management. The using of fair value will increase the authority's freedom to deal with accounting. But in future, the fair value will play the major role. The dissertation can be divided into four chapters:Chapter I: Introduction. This chapter introduces the research background, motivations, the main content, article framework.Chapter II: The second chapter is mainly concerned about the basic theory of the fair value and earnings management. First of all, the author recalls the history of fair value ever used in China.Chapter III: This chapter analyzes both earnings management and fair value. Fair value is a kind of accounting measurement attribute. Like historical cost measurement ,fair-value is used to reveal the real accounting elements such as assets of assets, liabilities. However, compared with historical cost measurement, fair value measurement demands higher standard of measurement environment , higher technology and more subjective judgment, so that it has become the means of earnings management。Although it does not necessarily lead to earning management, fair-value is born to be the tool of earning management. Nowadays, 38 accounting principles have been released in our country, 19 of which have used the attribute of fair-value measurement to some extent. The author here tries to make concrete analysis of earnings management of greatly influenced and frequently occurring part element fair value in manufacturing industry, including debt restructuring, non-currency asset exchange, the merging of enterprises , financial instruments, investing real estate and proceed. In debt restructuring principles, the new "Standards No. 12 - debt restructuring" or "the new debt restructuring guidelines"again introduces the measurement attribute of fair-value. Debt restructuring principles regulate that the earnings of debt restructuring in four cases can all be recognized. Whether non-currency asset exchange has commercial nature depends on the verifiability of either of the following condition: 1. The future cash flow of the assets received and surrendered in the aspects of risk, time and sum is quite different ;2. The current values of the expected future cash flow of the assets received and surrendered is different, and the difference between them is more significant than the fair values of the assets received and surrendered. The judgment of either of the two conditions should be based on estimate, which offers a chance for enterprises'earning management. Under the present principles, the enterprise mergence under different controls probably causes goodwill because asset is measured by fair-value. according to the rules of Fixed assets depreciation reserves, goodwill shall be conducted a devalue test on period end and not allowed to amortize, which can lead to increases in assets. However, the specific norm on accounting treatment of good will still don't be released, which means that there are some space on earning management. In terms of Measurement of Financial Instruments, it is widely believed that fair value measurement is the best measurement attributes of financial instruments measurement. To derivative tool, fair value is the only related measurement attributes. it is difficult to fix fair value, especially under the condition that financial derivative tools don't be marked a price in open market, in addition , it is hard to estimate fair value when employing the existing valuation technique. If financial derivative tools is measured by fair value, which certainly cause unrealized gains or losses that probably encourage profit manipulation. Taking consideration of investing real estate, because of the price of real estate market is rising at high speed, real estate purchased by listed companies in the early year should be measured by fair value on basis of new rules, in that case, the value must greatly exceed the purchasing price and directly influencing company's net asset and profit. It can be imagined that fat profit will appear in accounting statements of listed companies possessing major investing real estate when employing fair value, and investment earning increasing, too. Of course, the fat profit means that more taxation should be contributed by enterprise. The author analyzes the situation of earning management on the basis of fair value measurement.Chapter IV: The fourth chapter in the third chapter on the basis of the precautionary measures and puts forward policy recommendations.This topic was established just after the new standards were promulgated but before they are put into effect in the whole country. Some tentative analysis is carried on the application and influence of the fair value in the new standards, and some perceivable problems are discussed, which may offer some references to the future improvement of the standards. The deficiency of this paper lies in the shallow depth of data collection and lack of support of actual data. The future job will be focused on such aspects.