Will the Change from Four to Three Classifications of Financial Assets Lead to a Substitution of Accrual Earnings Management for Real Earnings Management?

Congyue Luo

doi:10.4236/ojacct.2022.111001

Abstract

This paper investigates the substitution between accrual earnings management and real earnings management of listed companies after the change from four to three classifications of financial assets in China. This paper divides the financial data of A + H listed companies in China into two groups for the period of 2015-2020, considering the implementation of the Financial Instruments Standard as the time point, and investigates the impact of the change from four to three classifications of financial assets on the earnings management of financial assets of listed companies through OLS regression analysis and suest test. The results of the study show that after the change from four to three classifications of financial assets, the manipulation of financial asset classifications and derecognition of financial assets by listed companies decreased, and the manipulation of fair value measurement of financial assets increased; at the same time, the proportion of financial assets at fair value through profit or loss held by listed companies was significantly and positively related to the level of accrual earnings management.

Highlights

The phenomenon of earnings management has always been a hot issue in accounting theory, which mainly includes accrual earnings management and real earnings management
The three financial asset earnings management methods are first identified through each level of fair value measurement, and the sample is divided into two sub-sample groups for comparison using 2018 as the dividing time point to test hypothesis 1 and hypothesis 2
According to the results shown by the suest test, the p-value of FV1 is less than 0.01 and the difference between the coefficients of the two groups is significant, which indicates that the change from four to three classifications of financial assets can effectively discourage management from manipulating the derecognition of financial assets

Summary

Introduction

The phenomenon of earnings management has always been a hot issue in accounting theory, which mainly includes accrual earnings management and real earnings management. Accrual and real earnings managements are used interchangeably by companies to manipulate profits (Zang, 2012). This paper examines the partial substitution between accrual earnings management and real earnings management of A + H-listed companies after the revision of the Financial Assets Standard from the perspective of the reclassification of financial assets into three classifications from four classifications. This paper finds that, after the change from four classifications to three classifications, the real earnings management of financial assets decreases and the accrual of earnings management increases as the cost of real earnings management increases for listed companies.

Literature Review and Theoretical Analysis

Hypothesis

Empirical Research Design

Analysis of the Empirical Results

Findings

Conclusion