Equity Financial Assets: A Tool for Earnings Management—A Case Study of a Chinese Corporation

25 Pages Posted: 22 Mar 2019

See all articles by Yuanyuan Guo

Yuanyuan Guo

University of Nevada, Reno

Siqi Lu

Shanghai University of Finance and Economics - Shanghai University of Finance and Economics

Joshua Ronen

New York University (NYU) - Department of Accounting

Jianfang Ye

Shanghai University of Finance and Economics - School of Accountancy

Date Written: March 2019

Abstract

With China’s adoption of principles‐based international accounting standards and its convergence with International Accounting Standard 39 (IAS 39), Chinese companies have discretion under the original Accounting Standards for Enterprises 22 (CAS 22) as to how they account for the initial measurement, sale, and subsequent reclassification of financial assets. We use a Chinese company (‘Company A’) as a case study to illustrate how earnings are managed to exploit this discretion. We document that the company re‐classifies its available for sale equity investments as long‐term equity investments to decrease the volatility of the company’s apparent profits. We also make some predictions regarding how the company will handle its financial assets under the new standard, which is the same as IFRS 9. Our research contributes to the continuous improvement of China’s accounting standards and has implications for regulators of the capital market.

Keywords: CAS 22, Case study, Earnings management, Financial assets

Suggested Citation

Guo, Yuanyuan and Lu, Siqi and Ronen, Joshua and Ye, Jianfang, Equity Financial Assets: A Tool for Earnings Management—A Case Study of a Chinese Corporation (March 2019). Abacus, Vol. 55, Issue 1, pp. 180-204, 2019. Available at SSRN: https://ssrn.com/abstract=3358530 or http://dx.doi.org/10.1111/abac.12151

Yuanyuan Guo (Contact Author)

University of Nevada, Reno ( email )

1664 N. Virginia St
Reno, NV 89557
United States

Siqi Lu

Shanghai University of Finance and Economics - Shanghai University of Finance and Economics

China

Joshua Ronen

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
Suite 10-180
New York, NY 10012-1118
United States
212-998-4144 (Phone)
212-995-4599 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jronen/

Jianfang Ye

Shanghai University of Finance and Economics - School of Accountancy ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

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