Factors Affecting Provision For Asset Impairment Loss On The Value Relevance Of Financial Statements

In order to connect PRC's Accounting Standards (CAS) with International Accounting Standards and to accord with the international accounting convergence and the economic environments developing in China, the new CAS was issued and effective in February 15,2006 and January 1,2007, separately. Historical cost-based accounting information is unable to ojebtively express the operation performance of the business and to exactly refect the value of the firms.CAS for Business Enterprise No.8—Accounting Standards for Asset Impairemnt, provide a way for a firm to adjust the asset book value to approach its real value.This study addresses how this new CAS affects the value relevance of a firm's financial statements.Firstly, the study discussed the factors that affect the listed companies on SSE A shares from 2007 to 2008,to decide to recognize asset impairment. On the economic substantial factors, ROA of the industry and the ratio of earnings increased present this positive correlation; moreover, the ratio of sales increased shown unsignificant relation with the asset impairment recognition. Under the earnings management factors, the empirical results evidence shown that the debt ration, management changes, take big bath, and firm size all affect asset impairment reporting.The study also reviews all disclosures of asset impairments in financial statements of all the listed companies on SSE A shares. The empirical analysis focuses on how this new Accounting Standards for Asset Impairemns affect the value relevance of financial statements.Adopting Ohlson's accounting-based valuation model(1995)to study whether asset impairement affects the earnings and book value of equity are value-relevant. In addition, this study further investigates the earnings management behaviors, take big bath and income smoothing, how to affect asset impairments on the value relevance of a firm's financial statements. The results shown that take big bath behavior, which is a kind of speculative earnings management, will reduce the valuerelevance of earnings information and enhance the value relevance of equity book value information. Furthermore, income smoothing, a informative earnings management behavior, will increase the value relevance of earnings information and decrease the value relevance of equity book value information.