Today, many international accounting standards involve the issue of asset impairment, such as inventory, investments, fixed assets, construction contracts, employee benefits, income taxes, etc. Developing international accounting standards for asset impairment helps maintain consistency in the accounting methods used for asset impairment. In January 1998, China's Ministry of Finance announced the "Accounting System for Joint-Stock Limited Companies," which was the first time detailed regulations were made regarding the extraction of asset impairment provisions by joint-stock limited companies. Recently, the Ministry of Finance has issued a draft of the accounting standard for asset impairment for public comment. The draft clearly regulates specific issues such as the determination of asset impairment indicators, measurement of recoverable amounts of assets, confirmation and measurement of asset impairment losses, identification of asset groups and their impairment handling, goodwill impairment testing and handling, and disclosure related to asset impairment. This once again draws people's attention to asset impairment.
I. Theoretical Origins of Asset Impairment
Evolution of Asset Definition
Assets are the most important concept in accounting science, and a scientific asset concept or theory is the foundation for the existence and development of financial accounting theory and methods. With the advancement of science and technology and changes in the socio-economic environment, the essence, characteristics, and state of existence of assets are all changing.
The currently popular definition of assets reflects the concept of future economic benefits. The Financial Accounting Standards Board of the United States proposed in Statement of Financial Accounting Concepts No. 6: "An asset is a probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events." The concept of future economic benefits holds that the essence of an asset lies in its potential to generate future economic benefits. Therefore, the recognition or determination of an asset should not be based on whether it was acquired at a cost, but rather on whether it contains potential future economic benefits.
Regarding the definition of assets, there have been key changes in China's accounting standards. The "Enterprise Accounting Standards - Basic Standards" of 1992 defined assets as: "Assets are economic resources owned or controlled by an enterprise that can be measured in monetary terms, including various properties, claims, and other rights." This definition ignored the most fundamental nature that assets should possess, namely that they should be "expected to bring future economic benefits to the enterprise." Article 9 of the "Regulations on Enterprise Financial Accounting Reports" redefined assets as: "Assets refer to resources formed by past transactions or events and owned or controlled by an enterprise, which are expected to bring economic benefits to the enterprise." Based on this, the "Enterprise Accounting System" was formulated. Comparing these two definitions shows that the definition in the "Regulations on Enterprise Financial Accounting Reports" truly reveals the essence of assets, emphasizing that the nature of assets is the expectation of bringing economic benefits to the enterprise, which was overlooked in the original definition. Assets owned or controlled by an enterprise must possess effectiveness and profitability, having the ability or potential to serve the enterprise and bring economic benefits, or control others from obtaining such benefits, all of which should be considered assets of the enterprise. Conversely, if an item of wealth owned by an enterprise is not expected to bring future economic benefits, then it cannot be recognized as an asset of the enterprise. For example, property awaiting disposal that is not expected to result in economic inflows to the enterprise cannot be recognized as an asset of the enterprise.
The Nature of Asset Impairment Accounting
In accounting, the concept of assets has deep roots with economic concepts like "property" and "wealth," and its true value lies in current and future benefits. Defining assets as expected future economic benefits shifts the focus of financial accounting from the income statement to the balance sheet. Of course, whether this definition fully applies to "accounting science" remains controversial, but it captures the essence of assets and aligns well with the purpose of holding assets by enterprises, as holding assets aims to obtain future economic benefits. Theoretically, if assets are defined as expected future economic benefits, then when the book cost of an enterprise exceeds the expected future economic benefits of that asset, recording an asset impairment loss is logical. This is the essence of asset impairment accounting.
In general, from a macro perspective, China is in a period of rapid market economy development, so there is still uncertainty in policy. In today's rapidly developing market economy with increasingly fierce competition, recognizing possible or already occurred impairments of enterprise assets to reduce decision-making risks becomes inevitable. American accountant Chatfield once pointed out that "the development of accounting is reflective." Therefore, the emergence and development of impairment accounting is not only a significant manifestation and application of the prudence principle, but also reflects the objective requirements of the socio-economic environment.
II. The Development Process of Asset Impairment
In June 1996, the International Accounting Standards Committee decided to develop accounting standards for asset impairment, and in June 1998, it officially announced "International Accounting Standard No. 36: Asset Impairment." IAS 36 has a wide scope of application, covering various tangible, intangible, and financial assets, except for inventories, assets arising from construction contracts, deferred tax assets, employee benefits assets, and financial assets within the scope of IAS 32. Since the existing international accounting standards applicable to these assets already include specific requirements for recognition and measurement, IAS 36 also applies to assets recorded at revalued amounts according to the provisions of international accounting standards. IAS 36 states that on each balance sheet date, enterprises should assess whether there are signs that assets may have been impaired. If such signs exist, enterprises should estimate the recoverable amount of the assets. When the recoverable amount of an asset is lower than its carrying amount, the asset should be impaired to its recoverable amount, and the impairment loss should be recognized in the current period's profit or loss. Recognizing, measuring, recording, and reporting the impairment losses of assets in accounting is what constitutes asset impairment accounting. Asset impairment accounting, guided by decision-usefulness theory, completely breaks away from the "historical cost principle" and the "realization principle," using multiple measurement principles in measurement, representing a significant breakthrough in accounting theory.
For China, research and application of asset impairment can be divided into three stages up to now: First, in the "Accounting System for Joint-Stock Limited Companies," starting from 1998, foreign-listed companies, Hong Kong-listed companies, and companies issuing foreign capital shares overseas were required to provide for the "four reserves," namely bad debt reserve, short-term investment depreciation reserve, inventory depreciation reserve, and long-term investment impairment reserve. Other listed companies could follow these regulations, while non-listed companies were only required to provide for bad debt reserve. Second, the "Supplementary Provisions on Accounting Treatment Issues in the Accounting System for Joint-Stock Limited Companies" issued in 1999 expanded the application scope of the four impairment reserves to all joint-stock limited companies. Third, starting from 2001, the "Enterprise Accounting System" implemented within the scope of joint-stock limited companies expanded the "four reserves" to "eight reserves," adding fixed asset impairment reserve, intangible asset impairment reserve, construction-in-progress impairment reserve, and entrusted loan impairment reserve. It was stipulated that starting from January 1, 2001, enterprises should regularly or at least annually conduct comprehensive inspections of all assets and reasonably estimate possible losses according to the prudence principle, providing for possible asset losses.
III. Asset Impairment: A Double-Edged Sword
According to academic analysis of the pros and cons of asset impairment, the asset impairment policy makes enterprises confirm current earnings more conservatively and reflect their financial status more realistically and reasonably. However, it cannot be denied that for certain needs, the new policy may become a tool for profit management, especially in the first year of implementing the new policy. Enterprises can use the "retrospective adjustment method" to trace back the losses of the current year or future years to previous years, or advance the recognition of future year profits in the current period. At the same time, enterprises can influence current-year profits by choosing to under-provide or over-provide for the current year's asset impairment reserves. Therefore, it is necessary to timely repair the details of enterprise accounting standards.
Accounting data including impairment provisions are more decision-relevant.
Relevant experts' empirical studies on the Shanghai and Shenzhen stock markets show that in the two years of 2001 and 2002 since the implementation of the asset impairment provision system, although some listed companies used asset impairment provisions for profit management, overall, the asset impairment provision data provided by listed companies contained information increments. After providing for asset impairment, the accounting profit data of listed companies became more decision-relevant compared to before providing for asset impairment, and the accounting data after providing for asset impairment had stronger explanatory power for the company's stock market return rate.
There exists the phenomenon of some listed companies using the provision for asset impairment to manipulate profits.
Relevant experts conducted empirical studies on asset impairment provisions through different methods and perspectives and consistently concluded that listed companies used asset impairment provision policies for profit management. Through analyzing and empirically studying the provision for asset impairment of listed companies in 2001 and 2002, it was found that there existed the phenomenon of some listed companies using accounting for asset impairment to manage profits, such as through large-scale provisioning for "one-time full loss" and using the reversal of impairment provisions to prevent losses. Especially, loss-making and slightly profitable companies showed significant behavior, where loss-making companies mostly took advantage of the opportunity to "fully write off in one go," while slightly profitable companies reversed more provisions in the current year than they provided, highlighting the use of impairment provisions to increase current-year profits.
According to media reports, in 2002, 24 listed companies disclosed provisions for various impairment exceeding 1 billion yuan, among which there were 20 ST companies; 27 listed companies had various impairment provisions exceeding 50% of the company's net profit, among which there were 20 ST companies; meanwhile, 10 ST companies turned losses into profits by reversing previous impairment provisions. In 2003, the reversal of fixed asset impairment provisions by listed companies accounted for 23% of the eight impairment provisions, second only to bad debt provisions and inventory depreciation provisions; similar phenomena were observed in the 2004 annual report. This clearly indicates the extent to which certain types of listed companies manipulate profits through impairment provisions, particularly because fixed assets account for a large proportion of corporate assets, affecting a wide range, thus using fixed asset impairment provisions to manipulate profits also accounts for a considerable proportion.
IV. Asset Impairment: A Tool for Profit Manipulation?
Behind asset impairment, it's not just about the rules but more importantly the institutional factors. This essentially means the game between different interest groups, and the interest disputes involved in asset impairment accounting are particularly complex. It not only involves disputes between enterprises but also directly relates to the disputes between shareholders and management. These conflicts directly affect the implementation results of asset impairment accounting standards. Therefore, for enterprises to truthfully provide for asset impairment, on the one hand, it is a technical issue that depends on fair value research, as it provides an objective standard; but on the other hand, it is more importantly an issue of corporate governance structure and the integrity of managers. If the enterprise lacks integrity, even if the technology is perfect, it is still easy for management to bypass it, turning asset impairment into a tool for profit manipulation by management. Regarding the asset impairment accounting standards themselves, they can only solve technical issues related to asset impairment. Corporate governance and manager integrity issues exceed their capacity. Moreover, even just the technical standards for impairment are difficult to determine, as current fair value research is not yet perfect. For example, the market price of some specially manufactured assets is either hard to determine or can be determined but at high costs. Therefore, for this highly challenging issue, it is impossible to rely solely on one standard to solve it. It requires support from basic works such as corporate governance, internal control, fair value, and manager integrity.
Weighing the pros and cons of impairment versus no impairment, obviously, impairment is better than no impairment, which has been proven by the historical experience of China's accounting reform and is also verified by the history of international accounting development. Thus, we should correctly regard asset impairment.