Choice Of Accounting Policies And Earnings Management

The company's earnings management activities have been one of the academic and practitioners old topics, not only because the economy develops and the way it applies becomes complicated, but also it could mislead information about the users'decision, leading to serious economic consequences. Chinese enterprises almost use three ways to manipulate their profit, such as the choice of accounting policy, related party transactions and regulation of production, among which the choice of accounting policy of listed companies as the primary means.The choice of accounting policy bases on the provisions of accounting standards, the enterprises can change their accounting system conditions in accounting policy only when two happen, one is statutory and regulatory requirements of the Unified Change, second is that change can better reflect the real business situation. China issued new accounting standards in Feb 2006, more emphasis on the use of recognition and measurement criteria to determine whether the transactions comply with accounting standards, which provides a more flexible way of the enterprise for greater earnings space. During the implementation of the old accounting standards, verified by the theoretical and practical phenomenon, more listed companies adopt the provision for impairment of assets and reversal of inventory on a FIFO measurement method and LIFO, etc. But the new guidelines were targeted for this amendment to prohibit the vast majority of the reversal of asset impairment, removed the LIFO inventory valuation method, and effectively inhibited the listed companies'earnings management activities. The biggest new feature of the guidelines is the introduction of fair value measurement attributes, financial assets, investment property, debt restructuring, trade and other non-monetary assets are for the use of fair value measurement as its primary means. Without an open market, it mainly depends on the value techniques and it's subjective. In 1999, China has introduced the fair value to the debt restructuring and non-monetary transactions, but it was the use of a listed company earnings management and brought serious economic consequences, the Ministry of Finance in 2001 cancelled it.The new guidelines bring in the fair value in a larger region; no doubt it will bring earnings management of listed companies to take this opportunity. The author compares the old and the new guidelines; found that the biggest fair value changes are the financial assets and investment real estate types. But the criteria for the change between cost model and fair value measurement model are too strict, so the author focused on the study of financial assets. Reading the literature, collecting market data of new corporate accounting standards on four categories of classification and measurement of financial assets, I find that the provisions on the earnings management of listed companies provide a great opportunity. These are the standpoints from which this paper starts from.The old accounting standards divide the company's investment into two types as long-term investment and short-term investments. The former is further divided into long-term equity investments and long-term bond investments. New standards for short-term investments, long-term bond investments, and some special use of the long-term equity investment of financial assets are carried out the provisions of the relevant criteria. Old criteria emphasis the use of historical cost, and there is no manipulation space, but the new standards for four types of financial assets using the amortized cost method and fair value measurement method. Held to maturity investments and accounts receivable, loans, amortized cost method used, the cost of its nature and history, as the transaction available for sale financial assets and financial assets at fair value. This paper doesn't focus on the study of fair value, but on these two types of assets brought by a different method of accounting earnings management opportunities. The change in fair value during the holding period, trading of financial assets takes it into "fair value through profit or loss", and not impairment. But the available for sale financial assets take it into the net assets as "capital surplus", which has a store function, and can be released through the sale, and earnings management has a certain role.Chinese new corporate accounting standards on the classification and measurement of financial assets are most the same as the international Accounting Standard39---Financial Instruments:Recognition and Measurement" issued by the IASB. The financial crisis in 2008 pushed the fair value measurement attributes waves, most experts believe that it is the root. IASB verifies the reclassification of financial assets in Oct 2008. On November12 2009, IASB issued the "International Financial Reporting Standards Financial Instruments 9", using three stages to complete the accounting standards on financial instruments, completely replace IAS 39. The first one has been completed, the second stage involves skill impairment of financial assets, and the third stage is related to the hedge accounting, IFRS 9 will be implemented in 2013. In IFRS 9, the classification of financial assets, provision for the impairment, re-classification and other issues have been modified, and I believe the biggest change is the classification of financial assets and measurement. In Old guidelines, the available for sale financial assets are secure, because the companies in the initial recognition of financial assets are mainly depended on the management's subjective judgments, and the changes of the fair value in the period are brought to capital surplus. The classification in IFRS 9 is mainly based on testing and contract business model based on cash flow characteristics of the test, the change of financial assets available for sale introduced the FV-OCI mode, which does not allow disposal profit or loss. This can be a very good room for earnings management control.I read the analysis of the earnings management literature, find the listed companies manipulate the profit to refinancing, turnaround, profit smoothing purposes, etc. Most articles are related to the old accounting standards of the phenomenon of earnings management. The new guidelines implemented not for so long, the relevant articles are mainly comparative analysis of old and new, of which financial assets are classified and the earnings management research is not too much, and among these their focus are the relationship between theory and accounting for its comparative analysis on the practical manipulation, persuasion is not strong, and the empirical analysis of the article is not too much. Literature have pointed out that the listed companies in China use the available for sale financial assets as a tool, and the phenomenon reflects a negative impact, referring the IFRS 9 has some inhibitory effect, and the development of accounting standards closer to international accounting standards is inevitable, I believe that our listed companies on the classification of financial assets and earnings management research is necessary to allow us to find their own problems, but also for our country under the accounting standards further revised and updated to prepare. This article take it as a starting point, and the first overview of the theory related to earnings management, internal and external incentives, from the accounting standards, analyzes the stock under the old criteria in the guidelines and criteria for impairment of assets, combined with exact examples of the use of accounting policy for earnings management. Then refer to the new accounting standards, introduced the fair value as a new means of earnings management, and finally, focus on the financial assets. Compare the IAS 39 and IFRS 9, then the old and new accounting standards on investment activities, the differences between the trading financial assets and financial assets available for sale. The author supposes that in 2007's bull market, there are possibility to use the financial assets available for sale for earnings management, and then carry out an empirical research and analysis. Been limited by the data sources, the author mainly observe the data in 2007, and taking into account that the trend of stock market may also conduct an impact, so the author takes the 2008 as a control group. In the empirical part, the author describes the statistical analysis of the key variables and verify whether the listed companies under the same conditions have a preference to holders of financial assets available for sale; Then, using the regression model to test whether the listed companies use the way of disposing the financial assets available for sale to make profit earnings management, and taking the trading financial assets as another model for the control group regression. The empirical results show that under the same conditions, listed companies tend to hold financial assets available for sale, not for trading financial assets; descriptive statistics section shows that both in a good and poor market environment, such as in 2007and2008, the listed companies' financial assets held for sale are in greater ratio than that of financial assets held for trading. The profit from the disposal of available for sale financial assets leads the majority of the total profits. The result show that the smooth and turnover to profitable as a motivation for earnings management on the current disposal of available for sale financial assets have significant impact, and the trading financial assets account for a very small proportion of profits, and they have little connection with the earnings management in the listed companies.