Abstract

Accounting practice for asset impairment in China was similar with International Financial Reporting Standard (IFRS) over the 2003-2005 period. Managers of listed firms in China were allowed to write off and reverse asset impairment loss. In this same period, Chinese authorities used net income or return on equity as a standard to decide whether a firm was to be de-listed or allowed to make seasoned-equity offerings (SEOs). This special setting created an incentive to manage accounting earnings. Our empirical results show that Chinese firms will decrease the write-offs or increase the reversals of asset impairment losses to qualify for issuing new shares. They will also increase the write-offs or decrease the reversals of asset impairment losses to increase the probability of not reporting a loss in consecutive years with net losses. Our research design separates abnormal from normal write-offs and reversals. Moreover, we estimate the likelihood of earnings management before explaining its impact on the abnormal write-offs and reversals. We use write-offs and reversals of eight asset accounts and are able to show a complete picture of the impairment accounting in China. The results also provide a reference for countries that have applied for or will apply for the IFRS.