The Disposal of Assets to Manage Earnings after the Prohibition of Asset Impairment Reversals in China

• Main Authors: Chao-Hsin Huang, 黃朝信
• Other Authors: 杜榮瑞
• Format: Others
• Language: zh-TW
• Published: 2013
• Online Access: http://ndltd.ncl.edu.tw/handle/91750206466182264782

博士 === 國立臺灣大學 === 會計學研究所 === 101 === Firms that experience asset impairment generate a reverse account to determine the extent of impairment. If the accounting standards permit the reversing of a previously recognized impairment loss, this reversal provides an opportunity for earnings management. In this case, the impairment losses serve as a “cookie jar.” However, if the accounting standards prohibit the reversing of an impairment loss, managers can still utilize this cookie jar reversal with the subsequent sale and disposal of the impaired assets. The listed firms in China have abused the provision for the reversal of impairment losses to manage earnings. Thus, the Chinese government announced a new accounting standard—with effect from the reporting periods beginning on or after January 1, 2007—that prohibits the reversal of long-term asset impairments to limit the opportunistic reporting by managers following asset impairment recognition and reversal. This new standard gives an opportunity to examine whether managers would dispose of impaired assets to manipulate earnings based on overestimated asset impairments. Additionally, I also examine whether a corporate governance mechanism can mitigate this opportunistic behavior. Data were selected from China’s listed A shares between 2003 and 2009. The income from sales of assets before and after the change of this accounting standard is analyzed using the regression method. The abnormal accumulated impairment, which excludes the normal write-downs under the economic factors, is calculated in order to differentiate between managers’ opportunistic behaviors. Since the stock exchanges in China label firms in financial trouble as special treatment firms if they have a negative net income for two consecutive years, managers have an incentive to report a profit when their firm has reported losses in the prior year. The results show that firms that previously reported losses with higher abnormal accumulated impairments have a higher income from the sale of assets in the periods when accounting standards prohibit the reversal of impairments than in the periods when accounting standards permit the reversal. Specifically, firms that reversed impairment losses to manage earnings could still utilize the overestimated asset impairment by disposing of the impaired asset. The empirical findings also show that firms that previously reported losses with higher abnormal accumulated impairments and less corporate governance have a higher income from the sale of assets after the prohibition of the reversals. Further analysis finds that a mitigating effect comes from the shareholder structure. These findings could provide insights into policies for regulators and accounting standard setters.