Fair Value Measurement Items And Earnings Management Research

Fair value has been introduced to new accounting standards and has been used in accounting practice for five years. It is incomparably superior in the enhancement of authenticity of accounting information. The use of fair value is an inevitable trend, which is consistent with the development of the economic environment. Also, its own subjective characteristic has created a new method for the earnings management behaviour.During the2008economic crisis, it was found that earnings management had been applied in all main investment banks. The issue of fair value measurement has become a hot topic. Essentially, fair value measurement enhances fair trade and reflects the market price measurement basis, which solves the problem of accounting information relevance and timeliness. In practice, the introduction of fair value measurement to the new standards is "modest, cautious and conditional", which means conditions under which fair value measurement can be applied are strictly limited. However, the new accounting standards have entitled enterprises to more autonomy in the choice of accounting policies, i.e., accounting policies can be adjusted in accordance with the changes in the expectation of the enterprise’s financial situation. On the other hand, the fair value measurement and the market are not perfect; the acquirement of fair value involves estimations, which gives the enterprises more space in earnings management.Since financial industry is the key field of fair value measurement application, this paper focuses on annual reports from2007to2010of14commercial banks listed in Shanghai and Shenzhen stock markets. Firstly, I conducted a statistical analysis on items that are measured by fair value measurement, such as financial instruments, real estate investments, debt restructurings, non-monetary assets exchange, merging, etc, along with earnings management. I concluded that the fair value measurement items mentioned above had the potential for earnings management. Secondly, after measuring the earnings management level of the sample banks, I performed empirical tests on the correlation between earnings management and profit and loss account amount that were affected by fair value measurement items. I concluded that, other than fair value, investment income, non-operating income and asset impairment loss are all related to discretionary accruals, which means the fair value measurement items are associated with earnings management. Lastly, I proposed methods to regulate how the listed banks use fair value in earnings management.