Research On ICBC’s Earnings Quality Assessment Based On Fair Value Measurements

Measurement is the core of accounting. Asset pricing and earnings measurementare two main tasks of financial accounting. Fair value measurements (FVM) are oncemore introduced into Accounting Standard for Business Enterprises2006, whichpose significant impacts on recognition, measurement and representation ofaccounting elements. FVM are used in ten assets and liabilities in banking as basicand derivative financial instruments, non-financial instruments (precious metals, etc.).How to assess earnings quality of banks under FVM has received public attention,because it exerts direct influence on the application status of FVM and theconstruction of earnings quality assessment system. Therefore, seeking the rightassessment method of earnings quality under FVM, improving the application of FVMin banks, preventing financial crisis and strengthening internal control have been thepriority of accounting theory and practice.This thesis used normative study and descriptive case study methods; discussedabout FVM, earnings quality and the main impacts on earnings quality of FVM;analyzed the application status of FVM in the Industrial and Commercial Bank ofChina (ICBC); assessed the earnings quality of ICBC, combining ICBC’s2006-2012data and operation status; presented challenges that ICBC is confronted with whenusing FVM and brought forward some solutions. Three main conclusions of this paperare as follows. First, based on decision usefulness and faithful representation, thecriteria for earnings quality assessment is the ability of earnings realizability andsustainable growth, manifested as persistency, cash security, growth and safety.Second, ICBC used FVM to measure ten kinds of assets and liabilities including basicand derivative financial instruments, precious metals and debt-offsetting assets.Furthermore, with the development of financial innovation, the application of FVM inderivative financial instruments would be expanded, so does its influences uponearnings quality. Third, with good persistence, cash security and safety, the overallearnings quality of ICBC is relatively high. However, the growth of earnings qualityneeds to be strengthened.