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

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  • Yuanyuan Guo
  • Siqi Lu
  • Joshua Ronen
  • Jianfang Ye

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.

Suggested Citation

  • Yuanyuan Guo & Siqi Lu & Joshua Ronen & Jianfang Ye, 2019. "Equity Financial Assets: A Tool for Earnings Management—A Case Study of a Chinese Corporation," Abacus, Accounting Foundation, University of Sydney, vol. 55(1), pages 180-204, March.
    • Handle: RePEc:bla:abacus:v:55:y:2019:i:1:p:180-204
    DOI: 10.1111/abac.12151
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    Cited by:

    1. Alam, Nurul & Gao, Junbin & Jones, Stewart, 2021. "Corporate failure prediction: An evaluation of deep learning vs discrete hazard models," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).

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