A study of the relationship between asset impairment and earnings management.
Date Issued
2006
Date
2006
Author(s)
Cheng, Ying-Mei
DOI
zh-TW
Abstract
Name ：Ying-Mei Cheng Month / Year： June, 2006
Advisor ：Yan-Ching Tsai
Title ：A study of the relationship between asset impairment and earnings management.
Financial Accounting Standards Committee in Taiwan pronounced SFAS NO.35 “Accounting for Asset Impairment” in 2004. Since the implementation of SFAS NO.35 substantially involves accounting assumptions and estimates, firms maybe take advantage of SFAS NO.35 as an earnings management device. In addition, it is hard to obtain the ideal discount rate in the real world, so the determination of the discount rate may be another issue to be concerned and a source of earnings management after the adoption of SFAS NO.35.
The paper tries to examine the association between the amount of asset impairment reported and firm’s current performance in exploration of the existence of earnings management. The sample consists of TSE & OTC listing firms, which have implemented SFAS NO.35 and recognized impairment in 2003 annual financial reports or 2004 semi-annual financial reports. The paper also examines whether firms intend to manage earnings through the manipulation of the discount rate. The empirical analysis reveals that：
(1)The amount of asset impairment reported is significantly associated with the performance thresholds. The result indicates that managers may apply flexibility in the reporting decisions relating to asset impairment so as to smooth earnings or take big bath.
(2)The discount rate is insignificantly associated with the performance thresholds. The result reveals that managers may not overestimate the discount rate so as to manage earnings.
(3)The association between the discount rate and corporate governance is insignificant.
There is no manipulation behavior for the discount rate of value in use, and the possible reasons are：(1) the discount rate is not the only device for the amount determination of the amount for asset impairment, and managers maybe prefer other ways- an estimate of cash flow, for example. (2) maybe there are sample biases. (3) WACC calculated in the paper may be not the standard which firms take for an estimate of the discount rate.
In addition, I find that the discount rates taken by part of firms are unreasonable, SUNRACE (2.91%), PIHSIANG (3.30%), AMPI (3.62%), PRODISC (3.58%) and TACHAN(1.78%) et al., for example. The discount rates of these firms are below prime rate of Central Bank, and I think these firms may underestimate the discount rate to reduce the recognition of asset impairment.
Subjects
資產減損
折現率
公司治理
盈餘管理
Asset Impairment
The Discount Rate
Earnings Management
Corporate Governance
Type
other
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