The Impact Of Fair Value Measurement On Earnings Management

As the economic development process of globalization continues to accelerate,inorder to achieve the convergence with the International Accounting Standards,Financail Ministry of China promulgated a new corporate accounting standardssystem on Feb15th,2006and started implementing on Jan1st,2007.The biggesthighlight of this new accounting standards system is the comprehensive introductionof fair value measurement model.Until now,these new standards have beenimplimenting for almost seven years,during this time the Accounting Standards ofChina have done lots of jobs to improve this measurement model,like on Apr2rd,2010,Financial Ministry issued“the converging map of Chinese AccountingStandards and International Financial Reporting Standards”,which profoundlysummed up the building,the implementation process and the reform experience wehave got since2007.And in order to improve fair value’s operability,based on IFRS13,our Financial Ministry issued “the Accounting Standards of Enterprises No. X-at fairvalue (draft)”in May2012,which further refine the scope of fair valuemeasurement,its application conditions and applications path.However,as our marketis not completely effective and some human factors are hard to avoid,the sapce for fairvalue measurement to play its effectiveness remains limited,some people worry thatthe introduction of the fair value may provides a new means for compaines to smoothcorporate current profit,which will affect investors making the wrong decisions anddamaging their benefits.This paper combines the norm reserch and empirical research to analyze theimpact of fair value measurement on earnings management.I give fair value andearnings management accurate definition.By describing the related theories such ascomprehensive income theory,accounting objective theory and principal-agenttheory,I theoretically analyse the relations between fair value and earningsmanagement and take real estate listing corporation as a specific research point.Next,Ianalyse the application and influence of the fair value measurement in5fields offinancial instruments,business combination not under the same control,debtrestructuring,investment real estate and the non-monetary assets transaction,find outthe probability and operating methods that companies can use fair value measurement to control current earnings and use some typical companies from real estate listingcorporation as examples to analyse how these companies use fair value measurementto control earnings management.Meanwhile,in the empirical research part,I propose5hypotheses,evaluate some earnings management modes and select the modified Jonesmodel,add some dummy variables and construt a new model to examine the relationsbetween fair value and earnings management.Then I use Shanghai and ShenzhenA-share listed129companies in the real estate category and their2010,2011,2012annual financial statements as the data source,use statistical analysis tools to test5hypotheses and make out the empirical results.The empirical results indicate in5fields,which are financial instruments,businesscombination not under the same control,debt restructuring, investment property andnon-monetary assets transaction fields between earnings management,some relationsbetween fair values and earnings management are positively correlated,some arenegatively correlated;some relations are significant,some relations are notsignificant,significant negative correlation appears in the financial instrumentsfield,which means the application of fair value effectively inhibit the possibility byusing it to cotrol earnings management.positive correlations appear in the fields ofbusiness combination not under the same control, investment real estate and thenon-monetary assets transaction,but the correlations are not significant,the negativecorrelations appears in the debt restructuring field,and the correlation is also notsignificant.So the results indicate that the fair value measurement model provides aspace for earnings management in China’s real estate listed companies,but in thecurrent market environment and policy constraints,management authorities can notuse fair value to achieve their earnings management purposes.Finally,based on the conclusions of this study,in order to improve the applicationof the fair value measurement model and play its role in promoting China’s economicand social environment,I put forward following suggestions:(1)EstablishPolicical-Real Estate Bank and innovate financial products;(2)Select appropriatemethods to measure fair value and construct a reasonable real estate valuationsystem;(3)Reduce the real estate speculation and improve the fair value informationdisclosure system;(4)Pay attention to the independent rating agencies and auditdepartments when determining the fair value of the real estate industry.The main contribution of this article is the subject innovation.First,I choose thereal estate industry as my research point,not all the industries.Second,I analyse the application and influence of the fair value measurement in5fields,which are financialinstruments,business combination not under the same control,debtrestructuring,investment real estate and the non-monetary assets transaction,find outthe probability and specific operating methods that the real estate companies can usefair value measurement to control their earnings management,then use some typicalcompany of real estate listing corporation as examples to analyse how thesecompanies use fair value measurement to control earnings management.