Abstract

This study examines the incentives of listed companies to adopt the second revisions on the reclassification of financial assets of Financial Accounting Standard No.34 (FAS 34). The second revisions on FAS 34 allow firms to reclassify trading stock investments from financial assets measured at fair value through profit or loss to available-for-sale financial assets during the 2008 global financial crisis. The empirical results of this study show that debt covenants restriction is a significant factor affecting firms’ decision to reclassify trading stock investments to available-for-sale financial assets. Further, companies which would report a decline in earnings from the previous year’s before the reclassification of trading stock investments are more likely to reclassify those assets to available-for-sale financial assets. Further, the results also show that the amount of reclassified trading stock investments is related to the debt covenants restriction and the reluctance to report a decline in earnings. Our results provide evidence on the incentives of Taiwanese listed companies to reclassify financial assets that are exposed to the reporting risk of fair value accounting during a global financial crisis.  

Keywords

reclassification of financial assetsdebt covenants restrictionearnings management