Research On The Disclosure Of Extraordinary Items Of Listed Companies In China

The term"extraordinary items"generates from Persistence Concept as put forward by the famous accounting scholars Ramakrishnan and Thomas when they were studying the net profit of enterprises. From their point of view, the net profit acquired by enterprises is comprised of various parts and the persistence of each part differs from each other which can be generally divided into long-term net profit, short-term one and the one without persistence. The main standard to distinguish the above-mentioned situations lies in the frequency of trades and items during the profit gaining process, i.e. whether the trades were conducted regularly.Obviously, for investers, creditors and watchdog agencies, the profit with"long-term persistence" and the "extraordinary items" can reflect the most authentic production and operation condition and financial capability of an enterprise in a better way. Therefore, they are often regarded as the critical index of evaluating the overall value of an enterprise and predicting its potential in the future. However, because of their quality of be one-off and their contingency, the profit with "short-term persistence or without persistence"as well as the "non-extraordinary items"can not be considered as reliable and steady index in the policy-making process.In practice, nevertheless, enterprises make full use of the contingency and unpredicability of these short-term items to manage earnings like adjusting profits. There are numerous examples. Take the stock market in China as an example. Some scholars have studied the 2007 annual reports of 858 enterprises on the Shanghai Stock Market and they have found that 110 of them (accounting for 12.82% of the sample) have made up the deficits and gain surpluses by means of extraordinary items.And this number rises to 40.11% and 62.87% respectively in micro-profit earning enterprises and ST companies. As a result, in recent years, all circles have attached more and more attention to reinforcing the utilization and management of extraordinary items.In order to protect the profits of small and medium investors'interests and to lower their risks, from the year 1999 on, Chinese Security Regulatory Commission(CSRC) has begun to demand that the listed enterprises to unveil related information by adding "the net profit excluding extraordinary items"to the column"main financial data and index" in their annual reports to promote the relevance of the accounting information of enterpries, also for the purposes of preventing managing earning by extraordinary items and further regulating the release of financial reports of listed companies. Up until the end of 2010, three critical pieces of regulations and two revised ones have been released.Nowadays, when it comes to extraordinary items, the accounting circle focuses on such aspects as extraordinary items and earnings management, the impact of extraordinary items on the financial performance of enterprises and extraordinary items and the market feedbacks. Viewed specifically from the researches in China, the perspectives and direction of such studies are relatively common and simple. That is to say, generally the researches are conducted from the perspectives of listed companies. Most of them make an analysis of the current condition of an enterprise's revealing extraordinary items through the annual reports of several companies. They may also analyze the influence of such a revelation on the financial performance of an enterprise or they might study the possibility of an enterprise's manipulating profits by the items with empirical analysis. To put it in another way, these analyses are simple and static and the dynamic empirical analysis of the effect of Chinese Security Regulatory Commission's regulation is lacking. It is meaningless if the innerdirected behavior of enterprises is studied with no combination of the regulation of security regulatory departments.To make up for the deficiency, the paper develops by combining the ways of normative reasearches and empirical ones. It also investigates the current condition of the information manipulation of extraordinary items in listed companies in China and makes an analysis of the regulatory availablity of revealing the information of extraordinary items. The research goes on by providing suggestions to further regulate the revelation of the information of extraordinary items. The study consists of six parts:Chapter 1 is the introduction of my research on the disclosure of extraordinary items of listed companies, which describes the background, the objectives and significance of my research, the methods will be adopted as well as the main issues concerned in the paper.Chapter 2 is the literature review of related theory. This chapter gives a description of international accounting standards and those in the United States and UK as far as the concept of extraordinary items is concerned. At the same time, it summarizes the viewpoints of the scholars on the relationship of extraordinary items and earnings management, the information content of extraordinary items and their relevance to enterprise's value. Based on the empirical data of listed companies, it is found that some companies will utilize the extraordinary items to achieve the manipulation of earnings management, especially for micro-profit earning enterprises and ST companies. In addition, most of the research findings show that extraordinary items and the company's market value have little relevance.The third part reviews the development of CSRC's policy in the disclosure of extraordinary items (from 1999 to 2008) for Chinese listed companies. In this section, it not only lists the specific content of five specifications, but there is a detailed comparative analysis of each new or revised standards and specifications from the previous definition and content of the two aspects of the project. Finally, after five amendments, we found that the developing trend of the policies is:the definition of extraordinary items has become increasingly clear and complete, in order to implement in a better way. At the same time, the evolution of these provisions are more fully reflected the nature and characteristics of extraordinary items, thus the performance of listed companies should be more accurate and apparent. On the other hand, through the timely amendment of standards, it will adapt to the implementation of new accounting standards, satisfy the needs of he stock market on the demand for high-quality financial accounting information, and help investors to better identify the profitability of listed companies and evaluate the company's operating performance more objectively and impartially. From the dynamic and longitudinal perspectives, Chapter 4 conducts the empirical research to analyse the regulation effect on the disclosure of extraordinary items by CSRC in recent years. Based on the aforementioned policies and comparative analysis of the evolution, our hypothesis goes that since the definition of extraordinary items is more clear and accurate, the content covered by successive increases, and then if the regulation is effective, the extraordinary items under all previous regulation should increase each time. This paper chooses "the absolute value of the ratio of extraordinary items and net profit (| EI/NP|) " as the indicators. Due to objective factors, we're able to use data of only 6 consecutive years from 2004 to 2009 to study the effect of the regulations in the years of 2004,2007 and 2008. Through figure analysis, paired with t test and sound test, I notice that the ratio from 2004 to 2009 was increaseing gradually. In other words, we find empirical evidences to support our hypothesis, which means that the regulations on extraordinary items by China Securities Regulatory Commission are efficient as expected. Coupled with the fact that domestic scholars have proved that the policies from 1999 to 2004 had reached the desired control specifications, thus the conclusion can be reached that the policies are very effective and positive over the past decade.In Chapter 5, associated with the latest regulation for disclosure of extraordinary items, it selects 183 listed companies of 2009 in Shanghai stock exchange market as samples, whose extraordinary items have a great impact on net profit (no less than 50%), and analyse the current state of affairs and dilemma of identification and disclosure of extraordinary items in listed companies, by means of descriptive statistics and chart analysis. Then, it makes detailed recommendations for improvement, including unifying disclosure format, revising accounting standards and so on.The last section summarizes all findings and conclusions in this paper, and then points out that the paper integrates the analysis of regulation effect and the current situation of implementation as its innovation. It not only study the implementation comprehensively and deeply, but also benefit the extraordinary items disclosure regulation.