AN INVESTIGATION OF ACCOUNTING INFORMATION QUALITY:
A COMPARATIVE STUDY OF LISTED COMPANIES ON
THE STOCK EXCHANGE OF THAILAND AND CHINA
ASSISTANT PROFESSOR KITTIMA ACARANUPONG, Ph.D.
THE RESEARCH WAS FINANCIALLY SUPPORTED BY
UNIVERSITY OF THE THAI CHAMBER OF COMMERCE
2011
Title: An Investigation of Accounting Information Quality: A Comparative Study of
Listed Companies on the Stock Exchange of Thailand and China
Researcher: Assistant Professor Kittima Acaranupong, Ph.D.
Faculty/Department: School of Accountancy, University of the Thai Chamber of Commerce
Year of Accomplishment: 2011
No. of Pages: 102 Pages
Key words: Value Relevance of Earnings, Earnings Persistence
Abstract
*
The main objective of this study is to investigate the level of accounting
information quality of listed companies on the Stock Exchange of Thailand (SET) and the
Shanghai Stock Exchange (SSE). In addition, the paper also compares the level of
accounting information quality of listed companies of two countries. Two perspectives of
accounting information quality are measured: market-based perspective (value relevance of
earnings) and accounting-based perspective (earnings persistence). The regression of stock
return on earnings per share is the representative of the value relevance of earnings whilst
the regression of future earnings on current earnings is the representative of earnings
persistence. The results indicate that earnings are value relevant information and they have
the persistence properties for listed companies on the SET and the SSE. For the pooledperiods of the study, the value relevance of earnings of listed companies on the SET is more
than that of listed companies on the SSE. Similarly, earnings persistence of listed
companies on the SET is more than that of listed companies on the SSE significantly.
The study further investigates the value relevance of earnings and earnings
persistence for yearly data. The highest return and earnings relation is found in year 2008
while the highest earnings persistence is found in year 2007 for listed companies on the
SET and the SSE. In addition, the findings reveal that the significant difference of value
relevance of earnings between Thai and Chinese listed firms appears in year 2007, while the
significant difference of earnings persistence between listed companies on the SET and
the SSE is found in all years. That is, the value relevance of earnings of listed companies on
the SET is more than that of listed companies on the SSE in year 2007 whilst earnings
persistence of listed companies on the SET is more than that of listed companies on the SSE
for all years. The results in this paper will directly contribute to the accounting standard
setters for issuing the accounting standards and the regulators for issuing the control rules
including the investigation of accounting information quality of two stock exchanges.
*The research was financially supported by University of the Thai Chamber of Commerce.
ACKNOWLEDGEMENT
I am thankful to University of the Thai Chamber of Commerce for financially
support for this research. I am also thankful to the professional readers for the important
and valuable suggestions in refining and improving my research paper.
Kittima Acaranupong
Researcher
CONTENTS
PAGE
ABSTRACT IN ENGLISH
A
ACKNOWLEDGEMENT
B
CONTENTS
C
LIST OF TABLES
F
LIST OF FIGURES
H
CHAPTER 1 INTRODUCTION
1.1 Research Motivation
1
1.2 Research Objectives
3
1.3 Scope of Research
3
1.4 Research Methodolgy
3
1.5 Research Contribution
4
CHAPTER 2 LITERATURE REVIEW
2.1 Definition, Importance and Measures of Accounting Information
5
Quality
2.1.1 Definition of Accounting Information Quality
5
2.1.2 Importance of Accounting Information Quality
6
2.1.3 Measures of Accounting Information Quality
7
2.2 Background History of Thailand
9
2.2.1 Public Companies Act
10
2.2.2 Institutional Framework of Accounting in Thailand
10
2.2.3 Development of Thai Accounting Standards (TASs)
12
2.2.4 Accounting Measurements in Thailand
31
2.3 Background History of China
32
2.3.1 Current Status of Chinese Capital Market
33
2.3.2 Accounting Regulations in China for A and B Shares
35
2.3.3 Development of Chinese Accounting Standards
36
2.3.4 Accounting Measurements in China
46
2.4 Main Differences between Thailand and China
47
2.5 Effects of Differences in Countries Factors on Accounting Information
50
Quality
CONTENTS (Continued)
PAGE
2.5.1 Effects of Legal Systems on Accounting Information Quality
50
2.5.2 Effects of Corporate Ownership Structure on Accounting Information
50
Quality
2.5.3 Effects of Tax Systems on Accounting Information Quality
51
2.5.4 Effects of Accounting Principle on Accounting Information
52
Quality
2.5.5 Effects of Preparers’ Incentives on Accounting Information
58
Quality
CHAPTER 3 RESEARCH DESIGN
3.1 Sample Selection and Data Collection
59
3.2 Development of Research Hypotheses
59
3.3 Research Model and Hypotheses Testing
61
3.3.1 Model for Value Relevance Test
61
3.3.2 Model for Earnings Persistence Test
63
3.3.3 Tests of Differences between Independent Pearson Correlation
64
CHAPTER 4 EMPIRICAL RESULTS
4.1 Sample Characteristics
68
4.2 Empirical Results
69
4.2.1 Descriptive Statistics of Variables
69
4.2.2 Regression Results of Model (1) and Model (2)
72
4.2.3 Test of the Difference in Pearson Correlation
75
4.2.4 Additional Test: Regression Results Model (1) for Yearly Data
79
4.2.5 Additional Test: Regression Results Model (2) for Yearly Data
82
4.2.6 Test of the Difference in Pearson Correlation between Listed
85
Companies on the SET and the SSE :Yearly Data
CONTENTS (Continued)
PAGE
CHAPTER 5 CONCLUSIONS AND IMPLICATION
5.1 Conclusions
89
5.2 Implication
91
5.3 Limitation
91
5.4 Suggestion and Future Research
91
5.4.1 Suggestion of the Study
91
5.4.2 Suggestion for Future Research
92
REFERENCES
93
APPENDIX A Research Conceptual Diagram
97
APPENDIX B FAP Announcement No. 12/2552
98
BIOGRAPHY
102
LIST OF TABLES
TABLE
PAGE
2.1 Key Differences between Thai Accounting Standards (TASs) and IFRSs
17
2.2 Key Differences between Thai Accounting Standards (TASs) and IASs
21
2.3 Evolution of Accounting Regulations of Listed A Share Firms in China
36
as December 2005
2.4 New Accounting Standards for Business Enterprises
38
2.5 Main Differences between Thailand and China
48
2.6 Comparative in Accounting Practices between Thailand and China
49
4.1 Sample Characteristics
68
4.2 Descriptive Statistics of Stock Return, Earnings per Share of Year t and
69
Earnings per Share of year t+1
4.3 The Stock Exchange of Thailand Index (SET Index) and The Shanghai
70
Stock Exchange Composite Index (SSE Composite Index)
4.4 Pearson Correlation and Spearman Rank Correlation between Stock
71
Return and Earnings per Share of Year t
4.5 Pearson Correlation and Spearman Rank Correlation between Earnings
71
per Share of Year t+1 and Earnings per Share of Year t
4.6 Regression Results of Stock Return on Earnings
73
4.7 Regression Results of Earnings per Share of Year t+1 on Earnings per
74
Share of Year t
4.8 Test of Difference in Pearson Correlation between Return and Earnings
75
per Share between Listed Companies on the SET and the SSE
4.9 Test of Difference in Pearson Correlation between Earnings per
76
Share of Year t +1 and Earnings per Share of Year t between Listed
Companies on the SET and the SSE
4.10 Descriptive Statistics of Return and Earnings per Share for Yearly
79
Data
4.11Yearly Regression Results of Stock Return on Earnings per Share
80
4.12 Descriptive Statistics of Earnings per Share of Year t+1 and Earnings
82
per Share of Year t
LIST OF TABLES (Continued)
TABLE
4.13 Yearly Regression Results of Earnings per Share of Year t+1 on
PAGE
83
Earnings per Share of Year t
4.14 Test of the Difference in Pearson Correlation of Return and Earnings per
85
Share between Listed Companies on the SET and the SSE for Yearly
Data
4.15 Test of the Difference in Pearson Correlation of Earnings per Share of
Year t+1 and Earnings per Share of Year t between Listed Companies
on the SET and the SSE for Yearly data
87
LIST OF FIGURES
FIGURE
1.Research Conceptual Diagram
PAGE
97
1
CHAPTER 1
INTRODUCTION
1.1 Research Motivation
Several recent studies show that the accounting information quality is
affected by many factors; for example, institutional factors (Ball, Robins and Wu 2003),
the adoption of International Accounting Standards (IASs) or International Financial
Reporting Standards (IFRSs) (Ding, Hope, Jeanjean and Stolowy, 2007) and the level of
book-tax conformity (Atwood, Drake and Myers, 2010). Ball et al. (2003) indicate that
earnings in four East Asian countries (Hong Kong, Malaysia, Singapore and Thailand)
generally lack the transparency, which they define as timeliness in incorporating
economic income (particularly for economic losses). Many studies indicate the low level
of disclosure measured as disclosure index in this region compared with other
continentals (Leuz, Nanda, and Wysocki 2003). Thailand is also one country in this
region which accounting information quality is still less explored. Listed companies in
Thailand have low level of transparency and low level of disclosure. The corruption
perception index (CPI) in Thailand has low value (CPI is 3.6 in year 2008). China is
another country in Asian which has very low CPI value (CPI is 3.5 in year 2008) (cited
from www.transparency.org). Low CPI can be interpreted as low transparency and low
level of corporate governance.
In addition, the adoption of IASs/IFRSs indicates the high level of
accounting information quality (Barth, Landsman, and Lang, 2008). Absence score (from
IAS) of Thailand country is 29 and Divergence score (from IAS) of Thailand country is 7
conducted by Ding et al. (2007). Although the issuance of Thai Accounting Standards
(TAS) is the adoption from IAS more than before, the accounting information quality of
Thai listed companies still is suspected. The study’s objective is to explore the level of
accounting information quality of listed companies on the Stock Exchange of Thailand
(SET). China is the country in Asia which the accounting standards are under control of
government. China has just started the implementation of IAS/IFRS since the year 2006.
The Chinese Accounting Standards (CASs) are issued by the Ministry of Finance.
Absence score (from IAS) of China is 14 and Divergence score (from IAS) of China is 15
conducted by Ding et al. (2007). Absence score means the accounting standards may
2
differ from what is required by IASs because of the absence of specific rules on the
recognition and measurement or no specific rules requiring disclosures. Divergence score
means inconsistencies between national and IASs rules. The difference in absence and
divergence score between Thailand and China indicates the different level of IAS/IFRS
adoption and implementation. Ball (2008) indicates that the adoption of IFRS offers
investors several advantages for example IFRSs promise more accurate, comprehensive
and timely financial statement information. We expect that the accounting information
qualities of two countries are different because of the difference in extent of IAS/IFRS
adoption. Another factor which affects the accounting information quality is the legal
system. Ball, Kothari, and Robin (2000) investigate the difference between common law
and code law. They state that earnings are more volatile, more informative and more
closely-followed by investors and analysts in common law countries. Common law makes
standards setting a private sector responsibility. Code-law countries generally are less
market-oriented, have proportionately larger government and unlisted private company
sectors, are less litigious and are more likely to operate an insider access model with less
emphasis on public financial reporting and disclosure. Earnings in code law system have
lower volatility and lower informativeness. Thailand and China have different legal
systems which also affect the accounting information quality. In Thailand, the accounting
professional bodies issue accounting standards, while the issuance of accounting
standards in China is the responsibility of public sectors. We also expect that the
accounting information qualities of two countries are different because of legal systems,
too. Thus, the main objective of this paper is to compare the accounting information
quality level of Thailand and China. The level of accounting information quality is
measured in term of value relevance of accounting information especially for earnings
(Barth, et al., 2008) and earnings persistence (Lev, 1983; Lipe, 1990; Dechow, Ge, and
Schrand, 2010; Atwood et al., 2010). Low value relevance of accounting information and
low level of earnings persistence indicate that low level of accounting information quality,
vice versa. Plausible reasons of differences in accounting information qualities between
two countries are the difference in legal systems (Ball, Kothari, and Robin, 2000),
difference in cultures (Hoftstede, 1980), difference in the extent of IAS/IFRS
implementation (Barth et al.,2008; Ball, 2008) and difference in book-tax conformity
level (Atwood et al., 2010). The study will provide the importance guidance to the
standard setters of two countries in issuance the new accounting standards and revising
3
the existing accounting standards. It also contributes to the regulatory control of both
stock exchanges (The Security Exchange Commissions-SEC in Thailand and The Chinese
Security Regulatory Commissions-CSRC in China) for monitoring and investigating the
quality of financial reporting.
1.2 Research Objectives
The main objectives in this paper are summarized as follows.
- To investigate the level of accounting information quality of listed
companies on the Stock Exchange of Thailand (SET);
- To investigate the level of accounting information quality of listed
companies on the Stock Exchange of China (especially for listed companies on the
Shanghai Stock Exchange-SSE); and
- To compare the level of accounting information quality of listed
companies on the Stock Exchange of Thailand (SET) and the Shanghai Stock Exchange
(SSE).
1.3 Scope of Research
The main scope of this paper is the study of the accounting information
quality of listed companies on the Stock Exchange of Thailand (SET) and listed
companies on the Shanghai Stock Exchange (SSE). The stock returns and financial
statement data of two countries are extracted from Data Stream Database. The periods of
study are the years 2005-2008.
1.4 Research Methodology
The accounting information quality is measured in two perspectives. The first
measure is the market-based perspective in term of value relevance of earnings. The
second measure is the accounting-based perspective in term of earnings persistence. The
regression of stock return on earnings is the measure of value relevance of earnings, while
the regression of future earnings on current earnings is the measure of earnings
persistence. The accounting information quality of each country is examined, separately.
Then, the value relevance and earnings persistence of listed companies on the SET and
the listed companies on the SSE are compared and test the statistical differences.
4
1.5 Research Contribution
The findings of paper will contribute to the accounting standard setters of
each country (Thailand and China). Standard setters can set the appropriate accounting
rules and set the level of implementation of IAS/IFRS to improve the accounting
information quality. If the results indicate that the country mainly implements IAS/IFRS
and the accounting information quality is high, this will provide some guidelines to set
standards by adopt IASs/IFRSs as the domestic accounting standards. That is, the
adoption of IAS/IFRS increases value relevance of earnings and improves earnings
persistence in each country. It will enhance the reliability of financial reporting.
In addition, the findings of paper will also contribute the Stock Exchange
Commissions (SEC) for both countries. It will help the SEC in each country for setting
the appropriate rules in investigation of accounting information quality.
5
CHAPTER 2
LITERATURE REVIEW
The chapter is composed of the main topics as follows.
- Definition, importance and measures of accounting information quality;
- Background of Thailand;
- Background of China;
- Main differences between Thailand and China; and
- Effects of the differences in countries factors on accounting information
quality.
2.1 Definition, Importance and Measures of Accounting Information Quality
2.1.1 Definition of Accounting Information Quality
The term “quality” in connection with accounting information can be
understood as the achievement of general objectives of accounting. Earnings are the
bottom line, the most interest item for financial statement users. Many prior researches
measure accounting quality in terms of earnings quality. The aim of earnings in income
statement according to IFRS, U.S. GAAP and Thai GAAP is to provide information about
the performance of company which can be served a wide target group in their economic
decision processes. Specially, addresses are enabled to judge both a company’s capacity
to generate cash flows as well as the point in time and the feasibility of their generation.
Information is, in this context, viewed as useful for a decision if it fulfills qualitative
characteristics. Qualitative characteristics are understandability, relevance, reliability, and
comparability. In addition, verifiability, along with representative faithfulness, provides
the basis for the key to accounting information quality of reliability defined by FASB as
“The quality of accounting information that assures that information is reasonable free
from error and bias and faithfully represents what its purports is to represent” (Statement
of Financial Accounting Concept-SFAC No.2).
Dechow and Schrand (2004) define earnings quality from the financial
analyst’s perspective as the degree to which information is provided to assess a
company’s current earnings performance, to serve as a good indicator of a company’s
future operative performance, and as an accurate annuity of the company’s intrinsic value.
6
The more accurate the current and future operating performance of a company can be
assessed by the reported earnings, thus higher quality of earnings will be.
Pronobis, Schweiter, Sperling, and Zurich (2009) defines earnings quality
as the degree to which understandable, relevant, reliable, and comparable information
about the performance on a company is provided to support the decision making
processes of the addresses.
Dechow et al. (2010) define earnings quality as follows.
Higher quality earnings provide more information about the features of a
firm’s financial performance that are relevant to a specific decision made by a specific
decision-maker. There are three features to note about their definition of earnings quality.
First, earnings quality is conditional on the decision-relevance of the information. Thus,
under their definition, the term “earnings quality” alone is meaningless, earnings is
defined only in the context of a specific decision model. Second, the quality of a reported
earnings number depends on whether it is informative about the firm’s financial
performance, many aspects of which are unobservable. Third, earnings quality is jointly
determined by the relevance of underlying financial performance to the decision and by
the ability of the accounting system to measure performance.
The definition of earnings quality suggests that quality could be evaluated
with respect to any decision that depends on the informative representation of financial
performance. It does not constrain quality to imply decision usefulness in context of
equity valuation decisions.
2.1.2 Importance of Accounting Information Quality
Accounting quality is important for several decision-making objectives.
For contracting objectives, earnings and their components often to be found in agreement
of compensation, bonus and lending or borrowing contracts. Poor earnings quality can
result in an involuntary transfer of wealth. In case of compensation agreements, earnings
which reported too highly can result in excessive bonus payments to the management.
With the regard to loan agreements, overstated earnings can obscure a worsening
company solvency and thus lead creditors to mistakenly extend the period of loan or delay
the recognition of its expiration (Schipper and Vincent, 2003). Earnings quality is also
essential for investment decision. A poor earnings quality has to be viewed importantly,
since it can send the misleading a signal resource allocation. It also leads to economically
7
inefficient decisions, if available resources are invested into projects with unrealizable
returns expectations instead of projects which actually realize the expected returns
(Schipper and Vincent, 2003). Finally, the importance of earnings quality as an indirect
indicator of the quality of financial reporting standards needs to emphasized. Numerous
empirical studies show a positive relation between the quality of earnings and quality of
accounting systems (for example, Barth, Beaver, and Landsman, 2001 and Barth et al.,
2008).
2.1.3 Measures of Accounting Information Quality
There are many measures of earnings quality which are used in empirical
accounting research. These measures reflect accounting-based attributes and market-based
attributes. Market-based and accounting-based measures serve different objectives.
Market-based measures are value relevance, timeliness and conservatism. Market-based
measures are measured in term of the correlation of earnings and stock’s prices or returns.
Accounting-based measures are earnings persistence, earnings predictability, quality of
accruals, earnings volatility and earnings management. Accounting-based measures are
based on cash flows or earnings themselves as frames of references for the assessment of
earnings quality. Market-based perspective views earnings as a reflection of economic
income as representative of stock returns. Accounting-based perspective, earnings are
viewed as the accrued distribution of cash flows.
For market-based measures, many prior researches measure accounting
information quality as the value relevance of accounting information. That is, how well of
accounting information is used in valuing securities (Kothari, 2001; Dechow et al., 2010).
Firms with higher quality of accounting information have a higher association between
stock prices, earnings, and equity book values because high quality of accounting better
reflects a firms’ underlying economics (Barth et al., 2001). Higher quality of accounting
information has less non opportunistic error in estimating accruals. Higher quality of
earnings are more value relevant (Lang, Raedy, and Yetman, 2003; Luez et al., 2003;
Lang, Raedy, and Wilson, 2006).
For accounting based-measures, Barth et al. (2008) exhibit that the
accounting information qualities are measured in term of earnings management, more
timely loss recognition, and high value relevance of accounting information. They
interpret that earnings that are less earnings management are being of high quality. Their
metric of earnings management are based on variance of change in net income, the ratio
8
of the variance of change in net income to the variance of change in cash flows, the
correlation of accruals and cash flows, and the frequency of small positive net income.
They interpret that a higher variance of change in net income, higher ratio of the variance
of change in net income to the variance of change in cash flows, less negative correlation
of accruals and cash flows and lower frequency of small positive net income as evidence
of less earnings management. They also indicate earnings that timely recognize loss as
being high quality. They measure timely recognizes loss as frequency of large negative
net income. Finally, they interpret accounting amounts that are more value relevant as
being high quality. The measurement of value relevance is the explanatory powers of net
income and equity book values for stock prices and stock returns. Ball and Shivakumar
(2005, 2006) suggest that timely recognition of gain/loss, which is consistent with higher
quality of earnings, tends to increase the volatility of earnings relate to cash flows.
Schipper and Vincent (2003) defined earnings quality constructs derived
from (1) the time-series properties of earnings; (2) selected qualitative characteristics in
the FASB’s Conceptual Framework and (3) the relations among income, cash and
accruals; and (4) implementation decisions.
Time-series properties of earnings constructs associated with earnings
quality include persistence, predictability ability, and variability. These three constructs
are linked by the properties of the earnings innovation series; persistence captures the
extent to which a given innovation remains the future realizations, predictive ability is a
function of the distribution (especially the variance) of the innovation series; and
variability measures the time-series variance of innovations directly.
The relations among income, cash and accruals are measured by link to the
decision usefulness and representational faithfulness. While the measures range in
complexity, all the constructs are based on the view of accruals, or some subset, therefore
reduce the earnings quality. The measures in this constructs are composed of (1) ratio of
cash flow from operations to income (2) changes in total accruals (3) direct estimation of
abnormal (discretionary) accruals using accounting fundamentals and (4) direct estimation
of accruals to cash relations.
Earnings quality is also derived from the qualitative concepts in the
FASB’s conceptual framework. Defining financial reporting quality in term of relevance,
reliability and comparability is empirically problematic if the intent is to assess the three
components separately. Researchers have used of regressions of market metrics, such as
9
stock prices and returns, on earnings and related measures such as cash flows, to draw
inferences about attributes such as relevance and reliability (e.g. Dechow 1994). Barth et
al. (2001) interpret both explanatory power and estimated coefficients from these
regressions as capturing the combined relevance and reliability of earnings information,
or other financial reporting information, considered. As note earlier, the estimated
coefficient has also been interpreted as an indicator of persistence, distinct from combined
relevance and reliability.
Earnings quality construct derived from implementation decisions focus on
incentives and expertise of preparers and auditors. There are two approaches of this
perspective. The first is that earnings quality is inversely related to the amount of
judgment, estimation, and forecasting required of preparers of financial reports-quality
decreases with the increasing incidence of reported numbers that must be estimated by
management as part of the implementation of reporting standards. The second approach is
that quality is inversely related to the degree to which preparers take advantage of the
requirements for exercising judgments and making forecasts and estimates, resulting in
implementations that subvert the intent of the standards.
In addition, Dechow et al. (2010) organize the earnings quality proxies into
three board categories: properties earnings, investor responsiveness to earnings, and
external indicators of earnings misstatements. Category 1, properties of earnings include
earnings persistence and accruals, earnings smoothness, asymmetric timeliness and timely
loss recognition, and level of earnings management. Category 2, investor responsiveness
to earnings includes paper that use earnings response coefficient (ERC) or the R2 from the
earnings-return model as a proxy for earnings quality and that relate the ERC to another
construct such as auditor quality. Category 3, external indicators of earnings
misstatements include Accounting and Auditing Enforcement Releases (AAERs),
restatements, and internal control procedures deficiencies reported under Sarbanes Oxley
Act (SOX), all of which are viewed as indicators of errors or earnings management.
2.2 Background History of Thailand
Thailand has in place legislation governing the creation and responsibilities
of entities engaged in commercial activities: the Public Companies Act, the Accounting
Act, and the Accounting Professions Act. The Accounting Standard-Setting Committee
reviews international accounting standards and issues these as national standards, through
10
the government processes, thereby significantly reducing the gap between Thai
Accounting Standards and International Accounting Standards.
2.2.1 Pubic Companies Act
Before 1992, the Public Limited Company Act of 1978 and its
amendments regulated Thai publicly listed companies. However, some rules and
regulations of this particular law were believed to be too restrictive and were discouraging
companies from going public. For instance, the law disallowed cumulative voting. The
argument was that having a Board of Directors whose members represented different
groups of investors would create conflicts and hamper management effectiveness.
Cumulative voting, it was thought, could lead to a high turnover in the board, which
would be disruptive to company management. There were also concerns that the
provisions governing the criminal prosecution and penalties of directors and management
were harsh and inappropriate. Another issue was the proportion of shareholding by top
shareholders. The law prohibited the largest shareholders, as a group, from holding more
than 50 percent of total outstanding shares and other shareholders from holding more than
10 percent of outstanding shares individually. The provision discouraged original family
owners from registering their companies. The Public Company Act of 1992, adopted to
promote the development of publicly listed companies, relaxed the contentious provisions
of the 1978 Public Limited Company Act. Cumulative voting was made optional, the limit
on shareholdings by the largest shareholders was increased from 50 to 70 percent of total
outstanding shares, and the punishment for management misconduct was also lightened
considerably. The original company owners welcomed the changes and the number of
publicly listed companies subsequently rose to more than 600. However, the new
legislation removed a number of incentives that would have kept public companies
prudent and diligent in their operations. As the succeeding sections point out, the exit of these
provisions appears to have contributed to the 1997 financial crisis. The legal and regulatory
framework for the corporate sector also includes provisions related to insolvency.
2.2.2 Institutional Framework of Accounting in Thailand
The Accounting Act B.E. 2543 (2000) provides the basic requirements
relating to financial reporting by all business entities incorporated in Thailand. The
Accounting Act requires that, registered partnerships, limited companies, public limited
companies established under Thai Law, foreign entities and joint ventures operating in
Thailand under the Revenue Code have a duty to maintain books of accounts.
11
According to the rules prescribed under the Accounting Act; such accounts must be kept
for a period of at least 5 years after the accounting period.
The Accounting Professions Act B.E. 2547 (2004) governs the
accountancy profession in Thailand. A broad revision of the profession’s regulation was
undertaken and resulted in this Act being issued in 2004 transferring into law much of the
self-regulatory practices of the former professional body, the Institute of Certified
Accountants and Auditors of Thailand (ICAAT). This Act repealed the Auditor Act B.E.
2505 that regulated only auditors and introduced a new regulatory framework under which
all accounting professions-auditing, accounting/bookkeeping, managerial accounting, tax
accounting, accounting education and technology and other accounting services—are
supervised by a self-regulatory organization, The Federation of Accounting Professions
(FAP). The FAP is in charge of implementing the Accounting Professions Act under the
overall administration of the Ministry of Commerce. Under this Act, An Oversight
Committee on Accounting Professions was created to oversee the activities of the FAP,
endorse Thai accounting standards and rules developed by the Accounting StandardSetting Committee of the FAP, and consider appeals regarding FAP’s activities. The
Accounting Professions Act includes, among others, prescriptions for the following:
-Authority, organization, membership and functioning of FAP;
-Accounting Standards Committee (ASC), the accounting standard-setter;
-Auditing Professions Practices Control, including qualifications and
licensing of auditors;
- Setting auditing and ethics standards;
- Accounting/book-keeping professional qualifications and registration;
-Enforcing professional ethics for auditors and accountants and the
investigation and discipline of members; and
- Supervision of the professions.
Thai Accounting Standards (TAS) has been developed by accounting
professional bodies. Last three decades, the accounting standards are influenced by
United States of America Generally Accepted Accounting Principles (U.S.GAAP). Until
1997, financial crisis has happened throughout Asia Continentals. Thailand received the
funds from International Monetary Fund (IMF) and changes the accounting rules along
the line with International Accounting Standards (IAS). The Accounting Standard-Setting
12
Committee has reviewed and revised several standards and plans to issue these as national
standards, through the due process, thereby significantly reducing the gap between Thai
Accounting Standards 1 and IAS/IFRS. The revised Thai Accounting Standards will apply
to all companies, large and small (except for eight Thai Accounting Standards are not
applicable for non-public companies: TAS 7 Cash Flow Statements, TAS 14 Segment
Reporting, TAS 24 Related Party Disclosures, TAS 27 Consolidated and Separate
Financial Statements, TAS 28 Investments in Associates, TAS 36 Impairment of Assets,
TAS 31 Interests in Joint Ventures, TAS 39 Financial Instruments-Recognition and
Measurement). IFRS were not designed to be applicable for small entities. A separate set
of simplified accounting and reporting standards devised specifically for small and
medium-sized entities (i.e. the entities that do not fall under the category of “publicinterests” entities) is necessary. However, for public interest entities full IFRS should be
adopted.
Since 1999, Thai accounting profession bodies issue the New Accounting
Conceptual Framework and many new accounting standards which are consistent with
IFRS. The main reason is that the IFRS implementation will increase the financial
reporting quality and enhance the comparability between domestic companies and
international companies.
2.2.3 Development of Thai Accounting Standards (TASs)
In this section, the development of TASs between the years 2005-2008 is
summarized as follows.
Year 2005
January 2005: ICAAT issued 57 Accounting Standards.
The Institute of Certified Accountants and Auditors of Thailand (ICAAT)
has issued a total of 57 accounting standards. Of those issued, 28 standards are currently
effective, seven standards are not yet required by Thai Laws, and 22 standards have been
superseded. In addition, there are nine accounting standards interpretations, four of which
are required by law. Under the Accounting Act B.E. 2543, Thai Accounting Standards
(TAS) must be approved by the Ministry of Commerce (MOC) and placed into law before
companies are required to adopt such standards. The ICAAT has drafted revisions to TAS
1
Nowadays, according to the FAP’s announcements no.12/2552, numberings of Thai Accounting Standards
are rearranged along the line with the numbering of IAS/IFRS (see Appendix B). Thus, the numbers of
TAS/TFRS in this paper are the new numbers for the year 2009 and later. However, when the paper refers
to the TAS/TFRS in the year 2008 and before, the numbering of TAS/TFRS are the old numbers.
13
No.40 Accounting for Investments in Debt and Equity Securities, TAS No.44
Consolidated and Separate Financial Statements, TAS No.45 Investment in Associates,
and TAS No.46 Interests in Joint Ventures.
The proposed revisions to TAS No.40 Accounting for Investments in Debt
and Equity Securities would make the standard more consistent with IAS No.39 Financial
Instruments: Recognition and Measurement. The proposed significant revisions to TAS
No.40 are as follows.
- Amended definitions of securities for trading, held-to-maturity debt
securities and available for sale securities.
- Guidance that would prohibit an entity from classifying any debt
securities as held-to-maturity if the entity has, during the current financial year or during
the two preceding financial years, sold or reclassified more than an insignificant amount
of held-to-maturity debt securities in relation to the total amount of held-to- maturity debt
security before maturity.
- Clarifying guidance for determining whether an investment is
considered to be impaired and additional guidance regarding the accounting for the
securities transferred between investment classifications
The proposed revisions to TAS No.44 Consolidated and Separate Financial
Statements would make the standard more consistent with IAS No.27. The proposed
significant revisions to TAS No.44 are as follows.
- Revised scope of application.
-Amended the definitions of consolidated financial statements, cost
method, a group, minority interest, and separate financial statements.
-Revised requirements regarding the presentation of consolidated financial
statements.
- Revised criteria for determining whether the financial statements of
entities should be included in consolidated financial statements for financial reporting
purposes.
- The financial statements of the parents and its subsidiaries used in the
preparation of the consolidated financial statements must be prepared as the same
reporting date unless it is impractical to do so.
14
- Investment in subsidiaries, jointly controlled entities, and associates in
the separate financial statements would be required to be accounted at cost in accordance
with TAS No.40.
- The proposed revision would also require additional related footnote
disclosures.
The proposed revisions to TAS No.45 Investments in Associates would
make the standard more consistent with IAS No.28. The proposed significant revisions to
TAS No.45 are as follows.
- The scope of this standard would be modified; whereby, the standard
would not apply to venture capital organizations, mutual funds, unit trusts and similar
entities including investment-linked insurance funds.
- The definitions of associates, consolidated financial statements, equity
method, jointly control, separate financial statements, significant influence, subsidiary
used in the standard would be revised.
- The proposed revision would change the guidance in determining
significant influence to include consideration of potential voting right.
- The requirement relating to the equity method and application of the
equity method would be amended.
- The proposed revision would require the consideration of impairment
losses to be in accordance with the methodology applied in TAS No.40 Accounting for
Investments in Debt and Equity Securities.
- The proposed revisions would amend the method of preparation of the
separate financial statements to comply with TAS No.44 Consolidated and Separate
Financial Statements.
The proposed revisions to TAS No.46 Interests in Joint Ventures would
make the standard more consistent with IAS No.31. The proposed significant revisions to
TAS No.46 are as follows.
- The standard would not apply to investments in jointly controlled entity
held by venture capital organizations, mutual funds, unit trusts and similar entities.
-The
standard
would
contain
exemptions
from
application
of
proportionate consolidation or the equity method similar to those provided for certain
parent companies not to prepare consolidated financial statements.
15
- The standard would be modified; whereby, investments to be disposed of
in near future, the words “in the near future” have been replaced to “within twelve
months”. Furthermore, the proposed revision would require that a venture that continues
to have joint control of an interest in a joint venture, which is operating under severe longterm restrictions, to apply proportionate consolidation or the equity method unless the
joint control is lost.
- The preparation of the separation of financial statements must be in
accordance with TAS No.44 Consolidated and Separate Financial Statements.
- The proposed revisions would amend current disclosure requirements.
May 2005: Reorganization of the ICAAT
The Institute of Certified Accountants and Auditors of Thailand (ICAAT)
has been reorganized and renamed the Federation of Accounting Professions (FAP).
Year 2006
September 2006: Setting the Panel
A panel has been established in Thailand in August 2006 to study and
express the opinions on International Financial Reporting Standards and International
Standard on Auditing. The panel consists of regulators, representatives of the accounting
and auditing profession and academics.
Year 2007
February 2007: The Revision of Accounting Standards
Accounting Standards in Thailand are issued by the FAP. Minor revisions
were made to the following TAS during 2006.
TAS No.52 Events after the Balance Sheet Date
TAs No.27 Disclosure of Information in Banks and Financial Institution’s
Financial Statement
TAS No.32 Property, Plant and Equipment
TAS No.44 Accounting for Investment in Subsidiary and Associates
FAP also issued the following draft guidelines:
Accounting for Derivatives and Embedded Derivatives and Accounting for
Securitization
16
As of December 31, 2006, the FAP has issued exposure drafts which revise
existing TAS to conform with International Financial Reporting Standards (IFRSs)
TAS No.29 Leases (IAS 17)
TAS No.31 Inventories (IAS 2)
TAS No.32 Property, Plant and Equipment (IAS 16)
TAS No.35 Presentation of Financial Statements (IAS 1)
TAS No.36 Impairment of Assets (IAS 36)
TAS No.44 Consolidated and Separate Financial Statements (IAS 27)
TAS No.45 Investment in Associates (IAS 28)
TAS No.46 Interests in Joint Ventures (IAS 31)
TAS No.47 Related Party Disclosures (IAS 24)
TAS No.51 Intangible Assets (IAS 38)
TAS No.55 Accounting for Government Grants and Disclosure of
Government Assistance (IAS 20)
TAS No.57 Agriculture (IAS 41)
In addition, FAP had also issued an exposure draft accounting standard
which covers Investment Property based on IAS No.40.
Year 2008
Distinguishes between existing TAS that has been approved by the FAP
and those have become effective by approval by the Board of Supervision and publication
in the Royal Gazette. The key differences between Thai Accounting Standards (TASs)
and IASs/IFRSs on March 31, 2008 2 are summarized in Table 2.1 and Table 2.2.
2
The numbers of TASs are the old numbers since they are the comparison of the differences between TASs
and IASs/IFRSs in the year 2008.
17
Table 2.1 Key Differences between Thai Accounting Standards (TASs) and IFRSs
IFRS No.
1
TAS No.
None
Topic
First-time adoption
IFRS
TAS
General principle is
Current not relevant
full retrospective
to Thailand.
application of IFRSs
in force at the time of
adoption, unless the
specific exceptions in
IFRS 1 permit or
require others.
2
None
Share-based
All share-based
Current not
payments
payment is recognized
addressed.
in financial statements,
using a fair value
measurement basis.
4
None
Insurance cost
Insurers are exempted
Current not
from applying the
addressed.
IASB framework and
certain existing IFRS.
Requires a test for the
adequacy of
recognized insurance
liabilities and an
impairment test for
reinsurance assets.
18
Table 2.1 (CONT.)
IFRS No.
TAS No.
Topic
IFRS
TAS
5
54
Non-current assets
Specifies classification, Currently not
held for Sale
measurement, and
addressed.
presentation
requirements for
non-current assets and
disposal groups which
are held for sale.
5
54
Timing of
Classifies an operation
Classifies an
discontinued
as discontinued at the
operation as
operation
date the operation
discontinuing at the
classifications
meet the criteria to be
earlier of the entity
classified as held for
entering into the
sale, or when entity
binding sale
has disposed the
agreement and the
operation.
board of directors
approving and
announcing a formal
disposal plan.
5
54
Presentation of
Required to be
Allowed to be
profit or loss of
included in the amount disclosed either on
discontinued
on the face of income
the face of the
operations
statement.
income statement or
in the notes.
5
54
Retroactive
classification of
an operation as
discontinued, when
the criteria for that
classification are not
met until after the
balance sheet date.
Prohibited.
Currently not
addressed.
19
Table 2.1 (CONT.)
IFRS No.
TAS No.
6
None
Topic
IFRS
TAS
Exploration for and IFRS No.6 does not
Currently not
evaluation of
require or prohibit any
addressed.
mineral assets
specific accounting
policies for the
recognition and
measurement of
exploration and
evaluation of mineral
assets.
7
None
Financial
IFRS no.7 requires
The current TAS
instrument
disclosure of
No.48 Financial
disclosures
information about the
Instruments: Disclosure
significance of
and Presentation is
financial instruments
based on IAS 32
for an entity’s
(revised 1998) and
financial position and
does not require all
performance.
additional disclosure as
per IFRS 7.
8
None
Operating
An operating segment
Currently not
segments
is a component of
addressed.
entity :
-that engages in
business activities
which may earn
revenues and incur
expenses (including
revenues and expenses
relating to transactions
with other components
of the same entity)
20
Table 2.1 (CONT.)
IFRS No.
TAS No.
Topic
IFRS
TAS
-whose operating
results are regularly
reviewed by the
entity’s chief
operating decision
maker to make
decisions about
resources to be
allocated to the
segment and assess its
performance; and
-for which discrete
financial information
is available.
Sources: Deloitt. IFRS and GAAP in the Kingdom of Thailand: GAAP Differences in
Your Pocket. Retrieved January 2, 2011 from www.iasplus.com/asia/
0805ifrsthai.pdf.
21
Table 2.2 Key Differences between Thai Accounting Standards (TASs) and IASs
IAS No.
TAS No.
1
35
Topic
IAS
TAS
Complete set of
Balance sheet,
Same, however
financial
income statement,
non-public entities
statements
statement of changes
can elect not to
in equity, cash flows
adopt TAS No.25,
statement, and notes.
Cash Flows
Statements.
7
25
Presenting cash
May either use direct
Insurance companies
flows from
or indirect method.
should use the direct
operating activities
method.
All other entities
may use either direct
or indirect method;
however in practice,
generally presented
under the indirect
method (even though
the direct method is
encouraged).
12
56
Deferred taxes
Deferred tax use the
Currently not
liability-balance
addressed.
sheet approach
which recognizes the
temporary difference
between tax based
and accounting based
assets and liabilities.
22
Table 2.2 (CONT.)
IAS No.
TAS No.
14
24
Topic
IAS
TAS
Types of segment
Requires disclosures
Required only for
disclosure
for both primary and
primary segment.
secondary segments.
16
32
Unit of measure
Components of an
Currently not
for depreciation
asset with differing
addressed.
patterns of benefits are
depreciated separately.
16
32
Depreciation of
Required to depreciate
Also allows for
property, plant and
through the profit or
depreciated on cost
equipment under
loss based on revalued
through profit or
revaluation model
amount.
loss with the
depreciation of the
revaluation surplus
through retained
earnings.
16
32
Property, plant and
Measured at fair value
Measured at fair
equipment
unless the exchange
value unless the
acquired in
transaction lacks
exchange assets
exchange for non-
commercial substance or
were similar.
monetary assets
the fair value of neither
the asset received nor the
asset given up is reliable
measured.
18
26 and 37 Revenue
General principles are
General principles
recognition
consistent with Thai
are consistent with
guidance
GAAP, however, more
IFRS.
detailed or industry
specific guidance is
available which may
cause differences in
practice.
23
Table 2.2 (CONT.)
IAS No.
19
TAS
None
Topic
IAS
TAS
Employee benefits
Underlying principle: the
Currently not
cost of providing
addressed.
employee benefits is
recognized in the period
in which the entity
receives services from
the employees, rather
than when benefits are
paid or payable.
20
55
Grants received to
Government grants are
Currently not
fund a specific
recognized only when
specifically
project
there is reasonable
addressed.
assurance that the entity
So the difference in
will comply with the
practices.
conditions attached to
the grants, and the
grants will be received.
Non-monetary grants
are usually recognized
at fair value, although
the recognition at nominal
value is permitted.
21
30
Definition of
The functional currency
Does not include
functional
is the currency of the
the concept of
currency and
primary economic
functional currency
presentation
environment in which
and the
currencies
the entity operates. The
presentation
presentation currency
currencies.
is the currency in which
The reporting
the financial statements
currency is the
are presented.
Thai Baht.
24
Table 2.2 (CONT.)
IAS No.
TAS No.
21
30
Topic
IAS
TAS
Foreign currency
There is no difference
There is a difference
translation method
in the translation
in the translation
method for a foreign
method for a foreign
business in which is a
business in which is
part of an integral
a part of an integral
operation or an
operation or an
independent foreign
independent foreign
entity. When
entity.
translating financial
When translating
statements of foreign
financial statements
operation, exchange
of a foreign business
rate differences
which is an integral
between period end
part of operation,
date and transaction
exchange rate
date should be
differences between
recognized in equity.
period end date and
transaction date
should be recognized
in profit and loss
immediately.
When translating
financial statements of
a foreign business
which is a foreign
entity, exchange rate
differences between
period end date and
transaction date should
be recognized in
equity.
25
Table 2.2 (CONT.)
IAS No.
23
TAS No.
33
Topic
IAS
TAS
Borrowing costs
May either capitalize
May either capitalize
relating to assets
as part of the cost of
as part of the cost of
that take
asset or charge to
asset or charge to
substantial time to
expense.
expense.
complete
Capitalization must
be required for
annual periods
beginning on or after
Jan 1, 2009, with
earlier
application will be
permitted.
24
47
Applicability
All entities.
Non-public entities
can elect not to
adopt TAS No.47,
Related Party
Disclosures.
24
47
Scope
Requires disclosure
Currently not
of the compensation
addressed.
of key management,
including an analysis
by type of
compensation.
27
44
Applicability
Effectively for
Non-public entities
entities whose equity
can elect not to
or debt securities are
adopt TAS No.44,
publicly traded or in
Consolidated
the process of issuing Financial Statements
securities to the
and Accounting for
public.
Investments in
Subsidiaries.
26
Table 2.2 (CONT.)
IAS No.
27
TAS No.
44
Topic
IAS
Accounting for
May use cost or
investments in
available-for-sale
subsidiary of
accounting.
TAS
Use cost method.
parent’s separate
Financial
Statements
28
45
Applicability
Effectively for
Non-public entities
entities whose equity
can elect not to
or debt securities are
adopt TAS No.45,
publicly traded or in
Accounting for
the process of issuing Investments in
securities to the
Associates.
public.
28
45
Accounting for
May use cost or
investments in
available-for-sale
associates of
accounting.
Use cost method.
investor’s separate
financial
statements
29
None
Adjusting the
The financial statement No specific TAS
financial statement
of an entity that reports
But reference is
of an entity that
in the currency of
made to application
operates in a
hyperinflationary
of IAS with TAS 30,
hyperinflationary
economic are stated in
The Effects of
economic
terms of the measuring
Changes in Foreign
unit current at the end
Exchange Rates.
of the reporting period.
27
Table 2.2 (CONT.)
IAS No.
TAS No.
31
46
Topic
Applicability
IAS
TAS
Effectively for
Non-public entities
entities whose equity
can elect not to
or debt securities are
adopt TAS No.46,
publicly traded or in
Interests in Joint
the process of issuing Ventures
securities to the
public.
31
46
Accounting for
May use cost or
Investment in joint
available-for-sale
ventures in the
accounting.
Use cost method.
venture’s financial
statement
32
48
Applicability
All entities.
Non-public entities
can elect not to
adopt TAS No.48,
Financial
Instruments:
Disclosure and
Presentation
28
Table 2.2 (CONT.)
IAS No.
TAS No.
32
48
Topic
Determination
IAS
TAS
Issuer’s classification
Currently not
of an instrument as a
addressed.
liability or an equity.
- based on substance,
not form of the
instrument;
-classification is made
at time of issue and is
not subsequent altered.
-an instrument is
financial liability if the
issuer may be
obligated to deliver
cash or another
financial asset or the
holder has a right to
demand cash or
another financial asset.
-an instrument does
not give rise to such a
contractual obligation
is an equity
instrument; and
-interest, dividends,
gains, and losses
relating to an
instrument classified
as a liability are
reported as income or
expense as
appropriate.
29
Table 2.2 (CONT.)
IAS No.
TAS No.
36
36
Topic
Applicability
IAS
All entities.
TAS
Non-public entities
can elect not to
adopt TAS No.36,
Impairment of
Assets.
36
36
Frequency of
A test for impairment Requires for
impairment testing
at least annually and
recoverable amount
of goodwill and
recoverable amount
to be measured
other intangible
calculated,
wherever there is an
assets with
irrespective of any
indication that it may
indefinite useful
indication of
be impaired.
lives or not yet
impairment exists.
available for use
36
36
Subsequent
Prohibit.
Permitted only if the
reversal of
certain criteria are
goodwill
met.
impairment losses
39
None
Applicability
All entities.
Currently there is no
TAS equivalent to
IAS 39. However the
following TAS can
provide accounting
guidance for various
financial
instruments:
TAS No. 11,
TAS No. 34,
TAS No. 40, and
TAS No. 42.
30
Table 2.2 (CONT.)
IAS No.
TAS No.
39
None
Topic
Recognition
IAS
TAS
All financial assets and
Derivative
financial liabilities
accounting is not
including all derivatives
currently addressed.
and certain embedded
derivatives are
recognized in the
statement of financial
position.
39
None
Hedging
IAS 39 provides three
Currently not
accounting
types of hedges:
addressed.
-fair value hedge;
-cash flow hedge; and
-hedge of a net
investment in foreign
entity.
40
None
Measurement basis Investment property
Currently not
for investment
is land or building
addressed.
property.
held (whether by the
owner or under a
financial lease) to
earn rentals or capital
appreciation or both.
40
None
Measurement basis An entity can choose
Currently not
for investment
either the fair value
addressed.
property.
or cost model
31
Table 2.2 (CONT.)
IAS No.
TAS No.
41
57
Topic
IAS
TAS
Measurement
All biological assets
Currently not
Basis
are measured at fair
addressed.
value less estimated
In practices these
point-of-sale costs
assets are typically
unless fair value
accounted for as
cannot be measured
inventory in
reliably.
accordance with,
TAS No .31
Inventories.
Sources: Deloitt. IFRS and GAAP in the Kingdom of Thailand: GAAP Differences in
Your Pocket. Retrieved January 2, 2011 from www.iasplus.com/asia/
0805ifrsthai.pdf.
2.2.4 Accounting Measurements in Thailand
For the business combination, TAS No. 43 Business Combination (revised
2007) requires only purchase method, pooling of interest method is not permitted.
Goodwill is the difference between the cost of acquisition and fair values of the assets and
liabilities acquired. Goodwill is indefinite intangible assets. It is tested for impairment
annually. The reversals for impairment losses of goodwill are not permitted as described
in TAS No.36 Impairments of Assets (revised 2007). All subsidiaries under the control of
the parent are consolidated. For the separate financial statements of parent companies,
investment in subsidiaries are valued under cost method (TAS No.27 revised 2007). The
equity method is used for investment in associates. Investment in joint ventures is account
for equity method or proportionate consolidated financial statements for jointly controlled
entity (TAS No.31 Investment in Joint Ventures). Inventories are valued at First-in, Firstout (FIFO), weighted average cost method, but Last-in, Last-out (LIFO) method is not
acceptable (TAS No.2 Inventories (revised 2007)). Inventories are valued at lower of cost
or net realizable values.
The valuation of property, plant, and equipment and intangible assets are
valued at cost. Revaluation is allowed for property, plant, and equipment and intangible
32
assets (TAS No. 16 Property, Plant and Equipment and TAS No.38 Intangible Assets,
respectively). For property, plant, and equipment, they are depreciable according their
useful lives. Intangible assets with finite useful lives are amortized according with useful
lives. Intangible assets with indefinite lives are not amortized, but they are test for
impairment annually. Financial lease are also capitalized if the conditions are met. The
main condition is the transfer of benefits and risks to the lessees. Research costs are
expensed, but the development costs are capitalized if the conditions are met according to
TAS No.38 Intangible assets. Contingent obligations are recognized when they are
probable and their amount can be reliably estimated.
2.3 Background History of China
The ultimate legislative authority of China is on National People’s
Congress, the higher state of power. It is elected in terms of five years and has the power
to amend the constitution, make laws, select president, and approve the national economic
plan.
The formation of the People’s Republic of China (PRC) was in year 1949.
Government adopted a policy of establishing a single public ownership economy with the
centralized management of business and control. All private companies had been
transformed into state or collective ownership. However, these state-owned enterprises
(SOEs) proved to be economic failures. More than half of them were losses. China
started its economic reform from a planned to a market-oriented economy in 1978.
Restructuring the loss-making SOEs was a major part of the subsequent economic
reforms, which aimed to transforming the centrally planned economy to a socialist market
economy. Under the reform agenda, private enterprises, cooperatives, and joint ventures
coexist and compete with all state entities. In last decades, China’s economic has been
fast growing with the highest annual growth rate in the world. Chinese companies were
raised fund both in domestics and international market. The first Stock Exchange in China
is the Shanghai Stock Exchange (SSE), which established in year 1984. Share dealings in
this market were not popular until year 1990. The second stock exchange in China is the
Shenzhen Stock Exchange (SZSE) was established in April 1991. Capital market in China
is controlled by the government. In July 1992, Chinese Security Regulatory Commissions
(CSRC) was set up to monitor and regulate the stock exchange. The numbers of listed
companies in two stock exchanges grow from 50 in 1992 to 1,200 in 2003. Companies in
China issue four categories of shares:
33
- “A shares” which can be owned by Chinese citizens, and are traded on the
two stock exchanges;
-
“B shares” (introduced in 1992), which can be owned by foreigners;
-
“C shares”, which are nontradable and held mainly by the government and
other SOEs; and
-
“H shares” which can be owned only by foreigners and are traded in
Hong Kong.
2.3.1 Current Status of Chinese Capital Market
Chinese capital market has developed rapidly since the establishment in
the early 1990s. By the end of year 2007, numbers of listed companies on Shanghai Stock
Exchange are 860 companies. China’s total market capitalization was RMB 3 269,838.87
(RMB 100 million). By the end of year 2006 and 2005, numbers of listed companies on
Shanghai Stock Exchange are 842 and 834 companies. China’s total market capitalization
was RMB 71,612.38 (RMB 100 million) in 2006 and 23,096.13 (RMB 100 million) in
2005. Chinese Capital market is segmented into A-share and B-share markets. A-share
can only be owned and traded by Chinese citizens, while B-shares are traded only foreign
investors.
Since accounting regulation and practices have also undergone a
significant change of purpose, from mainly serving macro-economic planning to provide
information for decision-making by investors and creditors. Before the economic reform
that began in 1978, accounting and financial reporting in China was mainly designed to
assist macro-economics planning. Accounting regulations were promulgated in the form
of an accounting rules, a centrally determined manual with details, rigid journal entry
requirements and a prescribed reporting format. Until 1980s, those who carried out
accounting works were not held in high regard in Chinese society compared with the
Western countries. Consequently, accounting education has never been developed in
China and was particular disrupted during the Cultural Revolution (mid 1960s).
After 1978, the reform transformed China’s purely stated-controlled
economy into a mixed economy, with companies owned by foreign companies and local
private investors. Its mixed nature created demand for an accounting system that would
serve not only stated but also other shareholders, who wanted accounting standards in the
3
RMB is Renminbi. It is Chinese yuan. It is the currency of People’s Republic of China.
34
line with internationally acceptable standards. This resulted in the re-emergence of a
private accounting profession, supported by the Accounting Law (1985) and the CPA
regulations (1986). The CPA regulations, promulgated by the state of council, prescribed
the scope of practices of certified public accountants (CPAs) and some working and
ethical rules. The development leads to the formation of the Chinese Institute of Certified
Public Accountants (CICPA) in 1988, which is the first professional accounting body in
China since the establishment of PRC in 1949.
Preparation of accounting standards did not start until 1988 when the
government-backed. Accounting society formed a research group to explore the
possibility of China replacing its accounting rules with accounting standards.
In year 1992, China was made historical progress in its reform of
accounting. The government also announced the plan to issue over 30 new accounting
standards in next few years. The conceptual accounting framework, first issues in 1992,
has since suspersed by 16 Chinese Accounting Standards and other regulations, such
Accounting Standards for Business Enterprises (ASBEs) issued in 2001. The ASBE,
aims to enhance the comparability of financial information, separate accounting and
taxation treatments, and ensure harmonization accepted accounting practices. ASBE
defines fundamental principles (going concern, accounting period, substance over form,
consistency,
timeliness,
understandability,
accrual
basis,
matching,
impairment
recognition, prudence, materiality and measurement currency vs. presentation currency),
and financial statement elements (assets, liabilities, owners’ equity, revenues, expenses,
and profits), which are similar to those IFRS. It also specifies contents of financial reports,
minimum notes to financial statements and how soon after the end of accounting period
reports should be published. The summary of concept of ASBE is as follows.
- General provisions: stewardship, economic decision-making, going concern
and accrual basis
- Qualitative requirements of accounting information: faithful representation,
relevance, reliability, understandability, comparability, substance over form, and prudence
- Definition of elements: assets, liabilities, owner’s equity, revenue, expenses,
and profits.
- Accounting measurements: Generally historical cost; if elements are
measured at replacement cost, net realizable value, present value, or fair value, the
enterprise should ensure that such amounts are available and can be readily measured.
35
Accounting period is required to be calendar year. Financial statements
consist of:
- Balance Sheet;
- Income Statement;
- Cash Flows Statement;
- Statement of Changes in Equity; and
- Notes to Financial Statements.
Additional statements are required disclosing asset impairments, changes
in capital structure, appropriations of profits, and business and geographical segments.
Notes includes of accounting policies, important post-balance-sheet events, and related
party transactions. Listed companies must assess their internal controls and engage an
external auditor to evaluate the controls and comment the self-assessment report. A
quarterly balance sheet, income statement, and notes to financial statements are required
for listed companies.
The last phase of internationalization on China accounting standards was
completed in 2006. Basic Accounting Principles (similar to conceptual framework) and
38 accounting standards prescribing particular practices were launched on February 14,
2006. Some of interpretations of standards were issued in 2007 and 2008.
However, China accounting practices still differ in some aspects from
those of IFRS. In some areas covered by IFRS, there are no specific rules in China. For
example, there are no specific rules in business combination issues including in the
contexts of acquisitions (IAS 22), impairment of assets (IAS 36), the definition of
operating and financial leases (IAS 17), employee benefits obligation (IAS 19) and
accounting for issuers for financial instruments (IAS 32). Further, there are no specific
rules requiring disclosures of discontinued operation (IAS 35), segment liabilities (IAS
14), or diluted earnings per share (IAS 33). Thus, listed companies on stock exchange in
China provided financial statements both in accordance with Chinese GAAP and IFRSs.
2.3.2Accounting Regulations in China for A and B shares
The accounting regulations applicable to Chinese listed firms depend on
the type of security issued, A or B shares or both. Firms that issue A shares are required to
comply with Chinese GAAP, while firms that issue B-shares are required to comply only
with IFRS. Firms that issue both A-shares and B-shares are required for both two sets of
36
annual reports, one based on Chinese GAAP, other based on IFRS. The IFRS-based
annual reports must be audited by an internationally recognized auditor, but not necessary
a Big 4 firm, while Chinese GAAP-based annual reports are audited by local accounting
firms. Both of set annual reports must be released to the public simultaneously and any
differences in net incomes between Chinese GAAP and IFRS must be reconciled and
presented in financial statements and footnotes.
Table 2.3 Evolution of Accounting Regulations of Listed A Share Firms in China as
December 31, 2005
Period
Accounting
Stage 1
Stage 2
Stage 3
1992-1997
1998-2000
2001-2006
1992 Accounting
1998 Accounting
2001 Accounting
Regulations in effect System Basic
System Basic
System Basic
throughout the stage
Standards,
Standards,
Standards,
CSRC Regulation
CSRC Regulation,
CSRC Regulation,
CASs*,
CASs*,
Accounting Laws
Accounting Laws
* CASs = Chinese Accounting Standards
Sources: Peng, S. Tondklar, R.H., Smith, J.L., & Harless, D.W. (2008). Does convergence of
accounting standards lead to the convergence of accounting practices?: A study
from China. The International Journal of Accounting. 43, 448-468.
2.3.3 Development of Chinese Accounting Standards
Year 2005
November 2005: Progress toward IFRS Convergence in China
Representatives of the China Accounting Standards Committee (CASC) of
the People’s Republic of China and Committee (PRCC) and the International Accounting
Standards Board (IASB) discuss a range of issues relating to the convergence of Chinese
Accounting Standards (CASs) with International Financial Reporting Standards (IFRSs).
The jointly statements include the main points as follows.
- China stated that convergence is one fundamental goals of its standard
setting program.
37
- China affirmed its intention that an enterprises applying CASs should
produce financial statements that are same as those an enterprise that applies IFRS.
- IASB delegation acknowledged that convergence with IFRSs will take a
time, and how to converge with IFRSs is a matter for China to determine.
- China’s Accounting Standards System for Business Enterprises is being
developed with a view to achieving convergence of those standards with equivalent IFRSs.
December 2005: Internal Control Reports and Moves toward Adoption of
ISAs
The China Securities Regulatory Commission is requiring that a company
listed on a Chinese stock exchange must (1) perform a self-assessment of its internal
controls and (b) engage an external auditor to evaluate its internal controls and comment
on its self- assessment report. This requirement which is effective for 2005 calendar yearend audits, is similar to that in Section 404 of the US Sarbanes-Oxley Act.
The Chinese Auditing Standards Board (CASB) and the International
Auditing and Assurance Standards Board (IAASB) have released a joint statement in
which CASB stated its intention to converge Chinese auditing standards with the
IAASB’s International Standards on Auditing (ISAs).
Year 2006
February 2006: New Accounting Standards for Business Enterprises
On 15 February 2006, the Ministry of Finance of the People’s Republic of
China (MOF) formally announces the issuance of long awaited Accounting Standards for
Business Enterprises (ASBEs) which consist of a new Basic Standard and 38 Specific
ASBEs. The ASBEs cover nearly all of topics under the current International Financial
Reporting Standards (IFRSs) literature and will become mandatory for listed Chinese
enterprises from January 1, 2007. Other Chinese enterprises are also encouraged to apply
ASBEs. These standards are substantially in line with IFRSs, except for certain
modifications which reflect China’s unique circumstances and environment.
38
Table 2.4 New Accounting Standards for Business Enterprises
ASBE
Title
Basic Standard
1
Inventories
2
Long-term Equity Investments
3
Investment Property
4
Fixed Assets
5
Biological Assets
6
Intangible Assets
7
Exchange of Non-Monetary Assets
8
Impairment of Assets
9
Employee Benefits
10
Enterprise Annuity Fund
11
Share-based Payment
12
Debt Restructuring
13
Contingencies
14
Revenue
15
Construction Contracts
16
Government Grants
17
Borrowing Costs
18
Income Taxes
19
Foreign Currency Translation
20
Business Combination
21
Leases
22
Recognition and Measurement of Financial Instruments
23
Transfer of Financial Assets
24
Hedging
25
Direct Insurance Contracts
26
Reinsurance Contracts
27
Extraction of Petroleum and Natural Gas
28
Accounting Policies, Changes in Accounting Estimates and Correction of
Errors
39
Table 2.4 (CONT.)
ASBE
Title
29
Events after the Balance Sheet Date
30
Presentation of Financial Statements
31
Cash Flow Statements
32
Interim Financial Reporting
33
Consolidated Financial Statements
34
Earnings per share
35
Segment Reporting
36
Related Party Disclosures
37
Presentation of Financial Instruments
38
First-time Adoption of Accounting Standards for Business Enterprises
Sources: Deloitt. China’s New Accounting Standards: A Comparison with Current PRC
GAAP and IFRS. Retrieved January 2, 2011 from www.iasplus.com/dttpubs/
0607ifrsenglish.pdf.
During the formulation of the ASBES, as highlighted in the Joint Statement
by the China Accounting Standards Committee (CASC) and the Chairman of the
International Accounting Standards Board (IASB) in November 2005, the MOF identified
a number of accounting areas where they might contribute to the IASB’s objective of
developing high quality solution of IFRSs. These include disclosure of related parties,
business combinations of entities under common control and fair value measurement.
The fundamental changes of ASBEs make the differences from the current
Generally Accepted Accounting Practice in Chinese Mainland (PRC GAAP).
Accordingly, they may have a significant impact on the result and/or net asset of
enterprises and on the presentation of financial statement as follows.
-The fair values of share-based payment transaction for employee services
should be measured and recognized as expense in income statement.
-For a business combination not involving entities under common control,
the acquisition method should be applied and the assets and liabilities of the acquired
enterprise should be measured at fair value.
40
-Goodwill (similar to the debit balance of equity investment difference
under current PRC GAAP) and indefinite life intangible assets are no longer amortised,
but instead they are tested at least annually for impairment.
-The discount on acquisition of a business (similar to the credit balance of
equity investment difference under current PRC GAAP) should be credited to profit
immediately.
-Minority interests should be presented within equity.
-A non-monetary assets related grant should be presented as deferred
income and recognized as income evenly over the useful life of the asset.
-Development costs should be capitalized if certain criteria are met.
-Borrowing costs incurred for general borrowings should be capitalized if
the capitalization conditions are met.
-Reversals of impairment losses in respect to fixed assets and intangible
assets are prohibited.
-All derivatives must be recognized on the balance sheet with the change in
fair value taken to profit or loss (unless they are designated as effective hedging
instruments).
-Investment property may be measured at fair value provided certain
criteria are met. And if so, fair value movements should be reported in profit or loss.
-Non-monetary transactions should be measured at fair value if the
commercial substance can be substantiated.
-Gain on debt restructuring should be recognized in profit and loss.
-Finance lease assets should be recognized by the lessee at the lower of fair
value and the present value of minimum lease payment.
-The tax payable method is prohibited. The tax effect accounting method
should be followed to account for the tax effect of temporary differences.
-An instrument which has both liability and equity components (e.g.
convertible bonds) needs to be spilt and the two components should be accounted for
separately.
Although ASBEs are substantially in line with IFRSs, they are still some
differences between ASBEs and IFRSs. Some of key differences are:
1. ASBE 4 and ASBE 6 only allow the cost model for measurement of
fixed assets and intangible assets, while IAS 16 allowed a revaluation method.
41
2. Under the ASBEs, land rights are normally classified as intangible assets
and not as operating leases. Where the land rights meet the criteria to be accounted for an
investment property, the accounting is not restricted to the value model as in IAS 40. The
cost model may be used.
3. For jointly controlled entities, ASBE 2 only allows the equity method of
accounting. IAS 31 allows proportionate consolidation.
4. ASBE 8 prohibits the reversal of all impairment losses where IAS 36
only prohibits the reversal of the impairment of goodwill.
5. Borrowing costs meeting the capitalization criteria should be capitalized.
However, IAS 26 gives an option to exercise all borrowing costs.
6. State-controlled entities are not regarded as related parties simply
because they are stated-controlled. There is no exemption for state-controlled entities
under IAS 24.
7. Biological assets shall be measured using the cost model unless there is
evidence of a reliable fair value under ASBE 5. This is in direct contrast to IAS 41 which
requires fair value to be used unless it is clearly unreliable.
8. Unlike IFRS 3, ASBE 20 includes and addresses within its scope
business combinations involving entities under common control. However, ASBE 20 does
not cover reverse acquisitions.
9. For presentation purposes, the ASBEs restrict certain options available
under IFRSs, for example, expenses shall be analyzed by function for income statement
presentation purposes, the direct method is required for cash flow statements and only the
gross presentation is allowed for government grants related assets.
April 2006: Market Development
The China Securities Regulatory Commission had a number of bright
announcements. New listing will resume soon on the Shanghai and Shenzhen markets,
after being banned for the last year because of difficulties in converting non-tradable
shares to tradable shares. Also China will allow companies and individuals to invest their
money oversees starting May 1. The new rules would allow Chinese citizens to purchase
up to US$20,000 per year in foreign currency. And lastly, the CSRC will introduce
margin trading and securities lending to prepare for the opening of a future exchange
early next year.
42
May 2006: Agreement between US SEC and China CSRC
The United States Securities and Exchange Commission (SEC) and the
China Securities Regulatory Commission (CSRC) announced today a new relationship to
increase their cooperation and collaboration through an enhanced bilateral dialogue.
Several aspects of the dialogue relate to financial reporting. The new dialogue has three
primary objectives:
-To identify and discuss securities markets regulatory developments of
common interest, particularly those relevant to reporting requirements for public
companies listed in one another’s market;
-To improve cooperation and the exchange of information in cross-border
securities enforcement matters; and
-To continue and expand upon the existing program of training and
technical assistance provided by the SEC to the CSRC.
July 2006: CSRC Issues the Important Documents relating to IPOs
The China Securities Regulatory Commission (CSRC) has issued the
following important documents relating to public offerings, including IPOs.
- Administrative rules of initial public offerings and listing of shares.
- Administrative rules for making public issues by the listed companies.
- The Standard for the form and content of information disclosed by
companies making public issues.
-No.1 Prospectus of Initial Public Offering (2006 revised)
-No.9 Application documents for initial public offering and listed of
guidance on shares (2006 revised)
-No.10 Application documents for listed companies making public issues.
November 2006: Guidance on Implementing IFRS-based Standards in
China
The Ministry of Finance of China has issued limited implementation 32 of
the 38 Accounting Standards for Business Enterprises (ASBEs) that it adopted in
February 2006, effective for 2007 financial reports of Chinese listed companies. The
guidance covers ASBEs 1-14, 16-24, 27, 28, 30, 31, 33, 34, 35, 37 and 38.
43
Year 2007
February 2007: First Batch of Questions and Answers from MOF on New
CASs
The China Accounting Standards Committee has formed an expert team for
the purpose of providing advice on implementing the new Chinese Accounting Standards
(CASs) which are applicable to listed PRC entities from January 1, 2007. In February
2007, this expert team issued its first batch questions and answers (Q&As) regarding
implementation issues of the new CASs. The Q&As cover the following issues:
-Business combinations involving entities under common control;
- Accounting for equity investment difference (debit balance) on first time
adoption of new CASs;
-Applicable tax rate for deferred tax computation purposes;
-Accounting for provision of safety expenses for special industries;
-Accounting for settlement of debt due to the listed company by its
shareholder by the shareholder’s investment in that listed company;
- Accounting for the right arising from removing the trading restriction from
non-tradable shares of listed companies;
-Accounting for fair value movement of financial assets by certain insurance
companies;
-Acquisition of minority interests;
- Accounting for transferring consumable biological assets or bearer
biological assets to welfare biological assets; and
- Transitional arrangement for A and H shares on first time adoption of new
CASs.
April 2007: Second batch of Questions and Answers from MOF on New
CASs
In April 2007, this expert team issued a second batch of questions and
answers (Q&As) regarding implementation issues of the new CASs. The second batch
Q&As cover the following issues:
-Subsequent measurement of investment properties;
- Termination benefits (employee benefits);
- Classification of held for trading and available for sale financial assets;
- Determination of the applicable tax rate for deferred tax calculation;
44
- How to account for Capital Surplus (within equity) arising from the previous
accounting rules;
- Sales and lease back transactions and operating leases incentives;
- Deferred tax on unrealized profits which are eliminated on consolidation; and
- Financial reporting of funds.
May 2007: Further Guidance on New Chinese Accounting Standards
The MOF has recently published the additional guidance on the CASs. It is
a 622 page book of interpretations of New Chinese Accounting Standards, in Chinese.
July 2007: China Expands the Use of its New IFRS-based Standards
The MOF required all listed companies to start using the new CASs in their
2007 annual financial statements. The MOF has now announced that use of new CASs
will be expanded to all stated-owned enterprises controlled by the Chinese central
government starting in 2008, and then to all large and medium-sized companies in China
starting in 2009.
September 2007: China Drops IFRS Reporting for Listed Companies
The China Securities and Regulatory Commission (CSRC) has withdrawn
its requirement that companies listed on Chinese Stock Exchange that issue ‘B’ shares
must publish audited financial statements that conform to International Financial
Reporting Statements (IFRSs) in addition to financial statements that conform to Chinese
Accounting Standards (CASs). ‘B’ shares are equity securities that trade in US dollars
(Shanghai) and Hong Kong dollars (Shenzhen) and, prior to 2001, could not be purchased
by residents of mainland China.
December 2007: MOF Issues Official Interpretation of CASs No.1
The Ministry of Finance has issued its first official interpretation of the new
Chinese Accounting Standards. It deals with the following ten issues:
-First time adoption of new CASs by companies issuing A and B shares or
A and H shares;
-Transaction or events not addressed directly in new CASs;
- Initial direct expenses incurred for obtaining a lease and costs incurred in
securing a construction contract;
45
- Conditions for recognizing a financial instrument as equity;
- Embedded derivatives in insurance contracts and lease contracts;
- Held for sale non-current assets;
-Transactions with associates or joint ventures and accounting for
investments in subsidiary;
- Accounting for restricted shares;
- Deferred tax on unrealized profits on intergroup transactions; and
- Recognition and measurement of assets and liabilities in restructurings.
Year 2008
January 2008: Practical Guidance to CAS 18 Income Taxes
Practical guidance to CAS 18 Income Taxes has been published in Chinese
Language. The concepts and requirements of CAS 18 Income Taxes are based on the
temporary difference approach in IAS 12 Income Taxes. CAS 18 (and other new CASs)
went into effect for the first time for 2007 reporting. Previously, many companies did not
recognize deferred taxes or, where they did, they followed a timing difference approach.
February 2008: Third Batch of Questions and Answers from MOF on
New CASs
In February 2008, this expert team issued its third batch questions and
answers (Q&As). The Q&As cover the following issues:
-Accounting for restricted shares by an investor who does not have control,
joint control, or significant influence;
-Accounting for warrant that are issued together with a bond;
-How to apply the Interpretation to CAS No.1 retrospectively to
investments in subsidiaries that are obtained before the date of first-time adoption of new
CASs;
-Determining the value of the underlying assets and liabilities in the
corporate reorganization of state-owned enterprises; and
-Accounting by securities investment funds and similar entities.
April 2008: FASB and CASC Sign Memorandum of Understanding
The Financial Accounting Standards Board (FASB) and the China
Accounting Standards Committee (CASC) have issued a Memorandum of Understanding
46
(MOU) articulating their commitment to strengthen cooperation and communication
between the two standards-setting organizations. The main points in the MOU are as
follows:
-The FASB and the CASC will enhance communication and improve
understanding in terms of technical issues to facilitate economic interaction between the
two countries;
-The FASB and the CASC will facilitate the exchange of experience of
accounting standard setting, implementation, and international convergence between the
two countries, including inviting each other to significant accounting standard seminars,
reciprocal visits, etc; and
-The FASB and the CASC will strive to exchange opinions regularly and
build the technical foundation for sharing views on convergence of accounting standards.
September 2008: MOF Issues Official Interpretations of CASs No.2
The PRC ministry of finance has issued its second official interpretation of
the New Chinese Accounting Standards. It deals with the following six issues:
-Companies issues both A and H shares should adopt same accounting
policies and accounting estimates except for the two substantial differences identified in
HK-PRC joint declarations on accounting standard signed in December 2007;
-Accounting for acquisition of additional interests in subsidiaries, and
adjustments of book value of an entity or its subsidiaries in reorganization for setting up
of a company;
- Treatment of joint ventures in consolidated financial statements;
- Accounting for warrants attached to separately tradable convertible
bonds;
- Accounting for BOT projects, which are similar to service concession
arrangements with IFRS; and
- Accounting for sales-and-leaseback transactions deemed to be operating
leases.
2.3.4 Accounting Measurements in China
The purchase method must be used to business combinations. Goodwill is the
difference between the cost of acquisition and the fair values of assets and liabilities
47
acquired. It is test of impairment for annually. The equity method is used for investment
in associates, those over the investee has significant influence. Equity method is also used
for investment in joint ventures. All subsidiaries under the control of the parent are
consolidated. Financial statements of foreign subsidiaries are translated based on primary
economic environment in which it operates. If it is the local environment, the balance
sheet is translated at the year-ended exchange rate; the income statement is translated at
average exchange rate for the year. The difference of translation is shown as equity. If it is
the parent environment, monetary item are translated at the year-end exchange rate, nonmonetary item are translated at the relevant transaction exchange rate and revenues and
expenses are translated at the transaction date (or the appropriate average of the period).
The translation difference is included in income statement.
Historical cost is the basis for valuing tangible assets, revaluations are not
allowed. They are depreciated over their useful lives, normally on a straight line basis.
Accelerated and units-of-production depreciation are also acceptable. FIFO and average
are acceptable costing methods, and inventories are written down to the net realizable
values and obsolescence. Acquired intangible assets are recorded at cost. Intangible assets
with finite life will be amortized over the life periods based on the pattern in which
benefits consumed. Intangibles with indefinite life will be impairment test annually.
Because land and much of industrial properties in China are owned by the state,
companies that acquire the rights to use land and properties show them as intangibles
assets. Assets are revalued only when state-owned enterprises are privatized. Certified
asset assessment firms or CPA firms determines the values of revaluation.
Research costs are expensed, but development costs are capitalized if
technology feasibility and cost recovery are established. Financial leases are capitalized if
the conditions are met. Deferred taxes are provided in full or all temporary differences.
Employee benefits are expensed as they are earned rather than when paid. Contingent
liabilities are recorded only when they are both probable and their reliable estimates.
2.4 Main Differences between Thailand and China
Main differences between Thailand and China can be summarized as in
Table 2.5. Comparative in accounting practices between Thailand and China can be
summarized as in Table 2.6.
48
Table 2.5 Main Differences between Thailand and China
Differences
Thailand
China
Legal System
Common Law
Code Law
Accounting Standards
Private Sector : Accounting
Public Sector : Ministry of
Setters
Professional Bodies
Finance
Absence/Divergence Score* Absence score : 29
Absence score : 14
Divergence score: 7
Divergence score : 15
Old establishment since
New establishment since
1977 (the Stock Exchange
1990 (the Shanghai Stock
of Thailand)
Exchange)
Contents of Accounting
Every accounting standards
Since 2006, China accounting
Standards
are consistent with contents
standards gradually
of IAS except TAS No.11
convergences to IAS. China’s
Doubtful Accounts and Bad
accounting regulations
Debt, TAS No.34 Debt
continue to depart from IFRS
Restructurings, and TAS
on two major issues.
No.40 Investment in equity
The definition of related parties
and debt securities which is
entities excludes most state-
consistent with U.S. GAAP.
owned enterprises (SOEs) in
Stock Market-Oriented
China, while IFRS consider all
SOEs are related parties.
The difference is found in
reversal of impairment of
depreciable assets. Regulators
in China believe that
impairment of tangible longterm assets are most likely
permanent, and recovery is
exception rather than the rule.
* Absence/Divergence scores are conducted by Ding et al. (2007). They summarizes that
the accounting differences with IAS are listed in four categories:
1. Accounting may differ from what is required by IAS because of the absence of specific
rules on recognition and measurement
49
2. No specific rules requiring disclosures
3. Inconsistencies between national and IAS rules that could lead to differences for many
enterprises in certain areas, and
4. In certain enterprises, those other issues could lead to differences from IAS.
Based on these four differences they define absence to be items from group one or two
and divergence to be items from group three and four.
Table 2.6 Comparative in Accounting Practices between Thailand and China
Accounting Practices
1. Business Combination:
Thailand
China
Purchase method
Purchase method
purchase or pooling of
interests method
2. Goodwill
3. Investment in Associates
Capitalized and impairment Capitalized and impairment
test
test
Equity Method
Equity Method
4.Property,Plant, Equipment Historical cost or revalued Historical cost
Valuation
5. Impairment Losses
amount
Revalued not allowed
Reversal of impairment
Reversal of impairment loss
losses are permitted
are not permitted for both
except goodwill
property, plant and
equipment and goodwill
6. Depreciation Charge
Economic based
Economic based
7. Intangible Assets
Historical cost or revalued Historical cost
amount
Revalued not allowed
8. LIFO inventory valuation
Not permitted
Not permitted
9. Probable Loss
Accrued
Accrued
10. Financial Leases
Capitalized
Capitalized
11. Deferred Tax
Accrued
Accrued
12. Reserves for income
No
No
smoothing
Main differences of accounting practices between Thai and China are the
valuation of property, plant and equipment and intangible assets. In Thailand, the
50
revaluation of PPE and intangible assets are allowed, but in China the revalued of PPE
and intangible assets are not permitted.
2.5 Effects of Differences in Countries Factors on Accounting Information Quality
2.5.1 Effects of Legal Systems on Accounting Information Quality
Ball et al. (2000) investigate differences in financial reporting quality
between common law and code law countries. Common law arises from what is
commonly accepted to be appropriate practice. Common law originated in England and
spread to its former colonies (U.S., Canada, Australia, and New Zealand). It tends to be
more market-oriented, supports a proportionately larger listed corporate sector, is more
litigious, tends to presume that investors are outsiders at arm’s length from the company,
and hence is more likely to presume that investors rely on timely public disclosure and
financial reporting. Earnings are more volatile, more informative, and more closelyfollowed by investors and analysts. The common law makes standard setters as private
sector responsibility.
Code law also takes its name from the process whereby laws, including
financial reporting rules, are created: they are coded in the public sector. Code law
originated from Continental Europe and spread to the former colonies of Belgium, France,
Germany, Italy, Portugal and Spain. Code law countries generally are less marketoriented, have larger proportionately government and unlisted private-company sectors,
are less litigious, are more likely to operate an insider access model with less emphasis on
public financial reporting and disclosure. There is less emphasis on timely recognition of
losses in public accounting statements, and earnings have lower volatility and lower
informativeness.
2.5.2 Effects of Corporate Ownership Structure on Accounting
Information Quality
La Porta, Lopez-de-Salanes, Sheleifer, and Vishny (1999) study the effects
of corporate ownership structure on earnings quality. They find that countries with
stronger investor protection have a lower concentration of ownership. They state that
ownership concentration is a substitute for legal protection because: 1) shareholders need
more control to avoid being expropriated by managers; and 2) small investors are not
interested in purchasing stocks due to less protection.
Political systems also affect
51
ownership structure. A government with prevalence of political rent-seeking may cause
concentration of ownership.
Fan and Wong (2002) study on the relation between corporate ownership
structure and the quality of accounting information in seven East Asian excluding Japan.
They use informativeness of accounting earnings to investors as a measure of quality of
accounting information. They develop two complementary arguments, pertaining to the
relations between ownership structure and earnings informativeness.
The first argument is related to the entrenchment effect of ownership
concentration. As the controlling owners are entrenched by their effective controls of
firms, their decisions that deprive the rights of minority interests are often uncontestable
in the weak legal systems in the region and by ineffective corporate governance
mechanisms such as board of directors and the market of corporate control. This market
perception will reduce the creditability of accounting earnings reports and consequently
the informativeness of those earnings.
The second argument is related to proprietary information and specific
human capital. By concentrating ownership, decision rights can be given to individuals
who posses personal knowledge.
Thus, this information effect argument predicts the concentrated ownership
is associated with opacity and low informativeness of accounting earnings. The results
found are consistent with the predictions of the entrenchments and information arguments.
They find that earnings informativeness, measured by the earnings-return relations, is
significantly related to the ultimate ownership’s control level, conditional owner having
gained effective control. This evidence supports the information effect. They also find
that earnings informativeness is significantly negatively related to the degree of
divergence between the ultimate ownership’s control and the equity ownership level. This
evidence supports the entrenchment effect.
2.5.3 Effects of Tax Systems on Accounting Information Quality
There are several ways that tax systems can affect earnings quality.
Earnings are less likely to reflect underlying business in country with close linkage
between financial reporting and taxable income (Guenther and Young, 2000). A close
linkage between accounting and tax laws reduce the quality of accounting standards
because they serve political purposes such as collection of taxes for governments. A high
52
tax rate will increase the incentives to reduce taxable income. Taxable income and
accounting income are linked even in countries with low book-tax conformity, such as
U.S. Therefore, a high tax rate will make the incentives to reduce profit.
Haw et al. (2004) find that tax compliance countries are associated with
lower earnings management, and have a greater effect than judicial system efficiency in
curbing earnings management.
Burgstahler, Hail, and Leuz (2006) document for a set of European
companies lower earnings management for public traded firms compared to private
companies (not traded). They also reveal that strong legal systems are associated with less
earnings management in private and public firms. They also provide the evidence that
private and public firms respond differentially to institutional factors, such as book-tax
alignment, outside investor protection, and capital market structure. Moreover, legal
institutions and capital market forces often appear to reinforce each other.
In addition, the difference in book-tax conformity level also affects to the
accounting information quality. Atwood et al. (2010) examine whether the level of
required book-tax conformity affects earnings persistence and the association between
earnings and future cash flows. They study 33 countries which include Thailand and
China in their samples. They develop a comprehensive book-tax conformity measure and
find that earnings have a lower persistence and a lower association between earnings and
future cash flows when book-tax conformity is higher. Their result suggests that increased
in book-tax conformity may reduce earnings quality.
2.5.4 Effects of Accounting Principles on Accounting Information
Quality
Historically, legal systems combined with other political and economic
differences, created a vast diversity of accounting systems which make the comparison of
financial reports more difficult. Joos and Lang (2004) investigate two European
Directives: Fourth and Seventh Directive. Fourth directive specifies True and Fair View
as a principle of financial reporting and defines the format of balance sheet and income
statement. The seventh directive addresses issues related to consolidation. It sets the
requirement and method of consolidation. They investigate the value relevance of firms
in U.K. and Germany. U.K. accounting model is to provide useful information to
shareholders, with a role that is distinct from tax reporting. German accounting model is
53
to provide information to debtors and tax reporting systems. They find that German firms
have lower Return on Equity (ROE), Earnings to Price (E/P) and book-to-market ratios
relative to U.K. firms. However, they do not find that earnings explain stock prices and
returns more in U.K. than in Germany. They also fail to find the convergence in ROE, E/P
and book-to-market ratio after the implementation of the directives. They conclude that
directives provide more form than substance because of differences in incentives of
financial reporting across countries.
Harris, Lang, and Moller (1994) test the value relevance of German firms
compared with value relevance of U.S. firms before and after the effective of two
directives. Their regression of returns on earnings and changes in earnings, deflated with
beginning market values, shows no difference in explanatory power between German and
U.S. GAAP earnings, both before and after two directives.
Auer (1996) tests the informativenesses of earnings announcements of
a sample of Swiss firms that changed their accounting standards from Swiss GAAP to
IAS or EC Directive-complaints accounting standards. He does not find significant
increases in abnormal returns around earnings announcements dates before and after firms
changes to IAS or EC Directive-complaints accounting standards. However, he finds a
significant increase in the variance of abnormal returns of firms changing to IAS. Two
papers stated above are the studies in the period of German country use German
accounting standards and under Euro directives.
Voluntary adoption of IAS accelerated in late 1990s in European firms.
More firms started to choose IAS as stock exchanges in Europe become more favorable
disposed toward IAS. Another important reason for surge in voluntary IAS adoption was
that IAS standards much be improved. A new set of core IAS was completed in 1998,
which requires firms claiming adoption of IAS compliance to comply fully with standards.
Thus, several countries in Europe including Austria, Belgium, France, Germany, Italy,
and Switzerland allowed firms voluntarily choose IAS instead of their domestic GAAP
(Van Tendeloo and Vanstraelen, 2005).
Ball (2005) summarizes the widespread international adoption of IFRS
offers investors a variety of potential advantages. These include:
IFRS provide more accurate, comprehensive and timely financial
statement information, relative to the national standards they replace for public financial
54
reporting in most of the countries adopting them, Continental Europe included. IFRS lead
to more-informed valuation in the equity markets and hence lower risk to investors.
Small investors are less likely than investment professionals to be able to
anticipate financial statement information from other sources. Improving financial
reporting quality allows them to compete better with professionals, and hence reduces
them is trading with better-informed professional.
IFRS eliminate many adjustments analysts historically have made in order
to make companies’ financials more comparable internationally. IFRS adoption therefore
could reduce the cost to investors of processing financial information (known as adverse
selection).
A bonus is that reducing the cost of processing financial information most
likely increases the efficiency with which the stock market incorporates it in prices. Most
investors can be expected to gain from increased market efficiency.
Reducing international differences in accounting standards assists to some
degree in removing barriers to cross-border acquisitions and divestitures, which in theory
will reward investors with increased takeover premiums.
In addition, IFRS lead to increased comparability and hence reduced
information costs and information risk to investors. IFRS offer several additional
advantages to investors. Because higher information quality should reduce both the risk to
all investors from owning shares and risk to less-informed investors due to adverse
selection. Advantages to investors arise from improving the usefulness of financial
statement information in contracting between firms and variety of parties, notable lenders
and managers (Watts, 1977; Watts and Zimmerman, 1986). Increased in transparency
causes managers to act more in the interests of shareholders. In particular, timelier loss
recognition in financial statements increases the incentives of managers to attend the
existing loss-making investments and strategies more quickly, and to undertake fewer
new investments with negative Net Present Value (NPV). In sum, the more extent to
adaptation of IFRS is the higher accounting information quality.
Harris and Muller (1999) examine whether reconciliation items explain
stock prices and returns. Their sample consists of firms that reconcile IAS earnings and
book values equity to U.S. GAAP using form 20-F. They find that differences in earnings
and book values of equity are insignificant specification between IAS and U.S. GAAP
and much smaller differences between U.S. GAAP and other accounting standards.
55
Bartov, Goldberg and Kim (2005) compare the value relevance of German
GAAP, IAS, and U.S. GAAP of firms traded on German stock exchange. Defining value
relevance as the coefficient of the regression of return on earnings deflated by beginning
market value, they find a higher coefficient on IAS and U.S. GAAP. The findings of
Bartov et al. (2005) are inconsistent with those of Hung and Subramanyam (2007) in
which German earnings have a higher coefficient in a regression of price on book value of
earnings. This inconsistency could be caused by omission of the book values of equity in
the regression model employed by Bartov et al. (2005).
Hung and Subramanyam (2007) compare the value relevance of two
accounting standards (German GAAP and IAS) by regressing stock prices on book values
and net incomes. They find that although differences in R-square under the two standards
are not significant, book values of equity have a higher coefficient under IAS and net
incomes have a higher coefficient under German GAAP. Low correlation between IAS
earnings and stock prices does not mean that IAS earnings are less efficient for
contracting and monitoring.
Barth et al. (2008) investigate whether the application of International
Accounting standards is associated with higher accounting information quality. The
application reflects the combined effects of features of the financial reporting systems,
including standards, their interpretations, enforcement, and litigation. They study 21
countries compared between pre and post adoption of IAS period. The countries in this
study are Australia, Austria, Belgium, China, Czech Republic, Denmark, Finland,
Germany, Greece, Hong Kong, Hungary, Poland, Portugal, Russian Federation, Singapore,
South Africa, Spain, Sweden, Switzerland, Turkey, and United Kingdom. They find that
firms applying IAS exhibit less earnings smoothing, less earnings management, more
timely recognition of losses, and a higher amount of association of accounting amounts
and share prices and returns. They also include research design features to mitigate the
effects of incentives and the economic environment; they can not guarantee that their
findings are attributable to the changes in financial reporting systems rather than changes
in firms’ incentives and the economic environment.
In addition, Armstrong, Barth and Rield (2010) study the European Stock
market reaction to the sixteen events associated with the adoption of IFRS in Europe.
Prior 2005, most European firms adopt domestic accounting standards. Thus, the adoption
of IFRS represented one of largest financial reporting changes in recent changes and was
56
controversial, generating debate that reached the highest level of government. Event
leading to the IFRS adoption in Europe provide an opportunity to assess investors’
expectations about the net benefits or net costs of IFRS adoption. They test for an overall
market reaction to IFRS adoption events. They find that investors in European firms react
positively to the adoption of IFRS. The findings are consistent with investors perceiving
that benefits associated with IFRS adoption will outweigh costs. Their findings indicate
that investors expect net benefits associated with increase information quality, decrease in
information asymmetry and more rigorous enforcement of the standards, and convergence.
In summary, research on the comparison among home country accounting
standards in the EU, U.S. GAAP and IAS provided the mixed results. Diverse results
come from the differences in samples, methodological issues.
Dechow et al. (2010) discuss the features of financial reporting that
researchers predict to affect earnings.
- accounting methods, broadly defined to include principles (full cost versus
successful efforts), estimated associated with accounting principles (e.g. straight line
versus accelerated depreciation), or estimates (e.g. pension accounting assumption)
-other
financial
reporting
practices
including
financial
statement
classification and interim reporting
-principles versus rules based methods.
There are only a small number of papers in the first category, likely due to
research design issues such as endogeneity (i.e. firms choose to follow the different
methods). When accounting methods are mandatory, there is no cross sectional variation
to examine. An alternative method is to study firms in different mandatory reporting
regimes. Overall the notion that accounting method choice, on average, leads to lower
quality earnings because managers make opportunistic choices rather than choices that
improve earnings informativeness does not much support.
For example cash flow
methods do not dominated accrual-based methods (that involve the estimation) in
forecasting cash flows (Dharan, 1987).
Moreover, investors appear to adjust their valuation decisions to reflect
information that is not reported (e.g. R&D expenditure) (Lev and Sougiannis, 1996).
Investors also appear to adjust their valuations when they anticipate earnings management
(Aboody and Lev, 1998).
57
Prior researches also examine the effects of financial statement
classification and interim reporting on earnings quality. McVay (2006) suggests that firms
opportunistically use discretion over income statement classification within a period to
shift expense into categories that might be perceived as less persistent (special items) to
meet analyst forecasts.
Finally, the evidence on the impact of principles-based versus rules-based
standards on earnings quality is mixed. Conceptually, a potential advantage of principlesbased versus rules-based is that removing alternative accounting treatments for a
transition in favor of a single principle that reflects underlying performance would result
in a more informative earnings number because it reduces opportunities for earnings
management. Managers cannot opportunistically apply an inappropriate method or
estimate but can claim that they were following stated accounting principles such as
U.S.GAAP or IAS as defense. A potential disadvantage is that principle-based standards
constrain a manager’s use discretion allowed within the standards to provide relevant
information.
Two studies, a field experiment and a survey conclude that principle-based
standards likely will not diminish opportunistic earnings management (Cuccia,
Hackenbrack and Nelson, 1995; Nelson, Elliott, and Tarpley, 2002). However, two
empirical analyses reach the opposite conclusion. Mergenthaler (2009) documents that
accounting standards with more rule-based characteristics are associated with greater
dollar magnitude of misstatements using a sample of GAAP violation firms. Barth et al.
(2008) argue that International Accounting Standards (IASs) are principle-based and find
evidence that the use of IAS is associated with less earnings management, more timely
loss recognition, and greater value relevance. They are careful to acknowledge that these
ex post characteristics of earnings also are a function of differences in institutions, which
affect the demand for information, enforcement, and fundamental firm characteristics of
the IAS adopters. While they attempt to control for these differences, the results are still
subject to this caveat.
Further, several studies comparing amounts based on, and the economic
implications of, applying IAS and domestic accounting standards. Van Tendeloo and
Vanstraelen (2005) find that German firms applying IAS do not exhibit differences in
earnings management when compared to those applying German accounting standards.
Daske (2006) find no evidence of a reduction in cost of capital for German firms that
58
apply IAS. Hung and Subramanyam (2007) find that accounting amounts based on
German standards and those based on IAS that are disclosed in accordance with
requirements for first-time adopters of IAS do not differ in value relevance. In the
opposite, Bartov, Goldberg, and Kim (2005) provide evidence that earnings based IASs
are more value relevant than earnings based on German standards. Eccher and Healy
(2003) compare accounting amounts based on IASs and Chinese standards and find that
those based on IASs are not more value relevant than those based on Chinese standards
for firms can be owned by foreign investors. However, the study finds that accounting
amounts based on IASs are less value relevant than those based on Chinese standards for
firms than can only owned by domestic accounting standards.
Barth et al. (2008) explain the possible reasons of mixing results of
individual countries is the firms preparing to adopt IAS likely transition gradually,
changing the accounting amounts based on domestic standards to be closer to those based
IAS. Another explanation is that developing countries lack the infrastructure to enforce
the application of IAS. That is the Eccher and Healy (2003)’s explanation for not finding
that IAS-based accounting amounts have higher value relevance. A third explanation is
that the studies differ in the effectiveness of controls for incentives associated with a
firm’s use of a particular set of accounting standards and effects of the economic
environments.
A fourth explanation is that the studies use different metrics, draw
data from somewhat different time periods, and use the different control variables.
3.5.5 Effects of Preparers’ Incentives on Accounting Information
Quality
Ball et al. (2003) study the four East Asian: Hong Kong, Malaysia,
Singapore and Thailand on propriety of accounting income. They study the interaction
between accounting standards and incentives of managers and auditors. Their study
derives from common law countries that are widely used as higher quality than code law
countries. They show that accounting standards and preparers incentives in these
countries interact to produce generally low quality of financial reporting. They concluded
that reporting quality ultimated is determined by the underlying economic and political
factors influencing managers and auditors incentives and not by accounting standards.
59
CHAPTER 3
RESEARCH DESIGN
This chapter comprises of the main topic as follows.
- Sample Selection and Data Collection
- Development of Research Hypotheses
- Research Model and Hypotheses Testing
3.1 Sample Selection and Data Collection
Scope of research is the study of listed companies on the Stock Exchange
of Thailand (SET) and listed companies on the Chinese Stock Exchange especially in the
Shanghai Stock Exchange (SSE). There are two stock exchanges in China: Shanghai and
Shanzen. The reason for selecting the Shanghai Stock Exchange is that it is main Stock
Exchange in China and old establishment than Shanzen. The samples consist of firms
listed on all industries. The SET composes of 8 main sectors: Agro &Food, Consumers
Products, Financials, Industrials, Property & Construction, Resources, Services and
Technology Sector, while the SSE composes of 5 main sectors: Industrials, Commercial,
Real Estate, Public Utilities and Conglomerates Sector. The period of study is the years
2006-2008. Stock prices, stock’s returns and accounting information for listed companies
on the SET and the SSE are extracted from Data Stream Database. Numbers of listed
companies on the SET and the SSE are 476 firms and 860 firms, respectively. The
samples in this study include all firms listed on the SET and the SSE all time of study. If
they are delisted from stock exchange before the year 2008, they will be deleted from the
samples of the study.
3.2 Development of Research Hypotheses
From Chapter 2, it indicates that Thailand and China have the many
different features for such as the difference in legal systems, difference in accounting
standard setters, difference in the extent of IAS/IFRS implementation and accounting
practices, and difference in the level of book-tax conformity.
For the legal systems, Thailand is common law country while China is
code law country. Earnings in common law countries are more volatile, more informative,
and more closely-followed by investors and analysts. The common law makes standard
60
setters as private sector responsibility. In addition, the private accounting professional
bodies in Thailand issue the accounting standards whilst the public sector issues the
accounting standards in China. Code law generally are less market-oriented, have large
proportionately government and unlisted private-company sectors. Earnings in code law
have lower volatility and lower informativeness (Ball, 2008).
The differences of extent IAS/IFRS adoption are presented by Ding et al.
(2007). The absence score from IAS of Thailand is 29 while that of China is 14. Absence
score of Thailand is more than China 2 times. It means that there are no specific rules on
recognition, measurement, or requiring disclosure in Thailand more than that of China.
The divergence score from IAS of Thailand is 7 while that of China is 15. On the
opposite side, the divergence score of China is more than Thailand two times. It means
that the inconsistencies between national and IAS rules of China are more than that of
Thailand. Wu and Wang (2009) demonstrate that up to a quarter of listed firms in China
explicitly admitted low quality of financial information by restating their previous
financial statements between 1999 and 2005. They also reveal that accounting
creditability in China has low value, providing low quality financial information bears a
little cost, since various market mechanisms fail to deter such behavior. We expect that
the accounting information qualities of two countries are different because of the
difference in the IAS/IFRS adoption.
Although both two countries have announced to adopt IAS/IFRS, there are
also the main differences in accounting practices between them. In Thailand, property,
plant and equipment are stated at historical cost or revalued amount while property, plant
and equipment in China only stated at historical cost and revaluation are not be allowed.
The reversals of impairment losses are permitted (except reversals of goodwill
impairment) in Thailand. In China, the reversals of impairment losses of any asset are not
permitted.
In addition, the levels of book-tax conformity of two countries also differ.
Atwood et al. (2010) reveal that China has higher level book-tax conformity than
Thailand. The level of book-tax conformity affects the earnings persistence. Their
findings indicate that the lower earnings persistence and lower association between
earnings and future cash flows are found in the countries with higher book-tax
conformity. Thus, the different in book-tax conformity between two countries will affect
the earnings quality of two countries.
61
Hence, the level of accounting information quality of Thailand and China
should be different because of the differences in many factors: legal systems, the standard
setters, the extent of IAS/IFRS adoption and accounting practices, and the level of booktax conformity (see appendix A). The null and alternative hypotheses of this paper are set
as follows.
H0: There is the same level of accounting information quality between the
listed companies on the Stock Exchange of Thailand and China.
H1: There is the different level of accounting information quality between
the listed companies on the Stock Exchange of Thailand and China.
3.3 Research Model and Hypotheses Testing
3.3.1 Model for Value Relevance Test
Accounting information quality in this paper is measured in two
perspectives: market-based and accounting-based perspective. Market-based perspective
views earnings as a reflection of economic income as representative of stock returns.
Many prior research measures the accounting information quality as the value relevance
of accounting information. They examine an earnings response coefficient (ERC) most
often short-term window, or the R2 from the earnings-return model, as the measure of the
investor responsiveness to earnings (Liu and Thomas, 2000; Holthaunsen and Watts,
2001). That is, how well of accounting information is used in valuing the securities
(Kothari, 2001; Barth, 2000). Theoretical based to return-earnings relationship is as
follows (Dechow et al., 2010).
Investors respond to information that has the value implications. A higher
correlation with value implies that earnings better reflect fundamental performance. The
measures directly link earnings to decision usefuleness, which is quality, albeit especially
in the context of quality valuation decisions.
Firms with higher quality of accounting information have a higher
association between stock prices, earnings and book value of equities because high quality
of accounting information reflect a firms’ underlying economics (Barth et al.,2001). High
quality of earnings are more-value relevant (Lang et al., 2003; Luez et al., 2003, Lang et
al., 2006; Dechow et al., 2010).
Model (1) is used to measure the value relevance of earnings of listed
companies on the SET and the SSE. Value relevance is measured in term of explanatory
62
power of earnings related to returns (Adjusted R2) and coefficient of earnings (α1) in
model (1). Model (1) is presented as follows.
Rit = α0 + α1 Eit + eit
(1)
Rit = 12 monthly return compounding after 2 months of the end of years;
Eit = basic earnings per share of firm i period t; and
eit = error term of firm i period t.
Model (1) is run by partitioning the samples into listed companies on the
Stock Exchange of Thailand (SET) and the Shanghai Stock Exchange (SSE). Adjusted R2
is used to measure how well earnings can explain the variability of stock returns in each
stock market. The t-statistics is used to test the significance of coefficient on earnings
(α1). Model (1) is run for pooled-sample data periods (the years 2006-2008) and yearly
data for each stock market.
To test the hypothesis on the difference of the accounting information
quality, the value relevance of earnings of listed companies on the SET and the SSE are
compared by testing the difference of correlations between returns and earnings. The
detailed of test of correlation is presented in section 3.3.3.
Measurement of Dependent Variable in Model (1)
The dependent variable of model (1) is stock return for the yearly reporting
period. Yearly period returns are measured by the continuously compounded twelve
monthly returns, beginning after two months of the ended of year. Monthly returns are
extracted from Data Stream database in form of Return Index (RI). Return Index (RI)
shows a theoretical growth in value of a shareholding over a specified period assuming
that dividends are reinvested to purchase additional units of an equity or unit trust at the
closing price applicable on the ex-dividend date.
From 1988 onwards (1973 for U.S. and Canadian Stocks), the availability
of detailed dividend payments enable a more realistic method to be used in which the
discrete quantity of dividend paid is added to price on the ex-ante of payment. The
formular of RIt is presented as follows.
63
RIt
RIt/RIt-1
(RIt/RIt-1)-1
= RIt-1*(Pt/Pt-1)
= Pt/Pt-1
= (Pt/Pt-1)-1
(RIt-RIt-1/RIt-1) = (Pt-Pt-1/Pt-1)
Monthly Return = (RIt/RIt-1)-1
Monthly Return = RIt-RIt-1/RIt-1
where
RIt = Return index in month t;
RIt-1 = Return index in month t-1;
Pt = Closing price at the end of moth t; and
Pt-1 = Closing price at the end of moth t-1.
Yearly period return (Rit) is compounded by accumulating twelve months
from the two months after the end of years. The return is calculated separately between
the listed companies on the SET and the SSE.
3.3.2 Model for Earnings Persistence Test
Accounting-based measures of accounting information quality are earnings
persistence, earnings predictability, quality of accruals, earnings volatility and earnings
management. In accounting-based perspective, earnings are viewed as the accrueddistribution of cash flows. This paper investigates the accounting-based measures of
accounting information quality in term of earnings persistence because much of research
on persistence focuses on the usefulness of earnings to equity investors for valuation. The
main assumption of earnings persistence is that more persistent earnings will yield better
inputs to equity valuation models, and hence a more persistent earnings number is of high
quality than a less persistent number. Further, more earnings persistence represents more
earnings quality because of its predictive values. Theoretical based related to earnings
persistence is as follows.
Firms with more persistent earnings have a more “sustainable”
earnings/cash flows stream that will make it a more useful into discounted cash flow
(DCF)-based equity valuation. The logic behind earnings persistence being quality metric
is as follows (Dechow et al., 2010).
If firm A has a more persistent earnings stream than firm B, in perpetuity,
then (i) in firm A, current earnings is a more useful summary of future performance and
64
(ii) annuitizing current earnings in firm A will give smaller valuation errors than
annuitizing current earnings in firm B. Thus, higher persistence is of higher quality
whether earnings is also value relevant.
Model (2) is used to measure earnings persistence. Earnings persistence is
based on the estimation of slope coefficients (β1) from the regression of future earnings
(Et+1) on current earnings (Et) (Lev, 1983; Kormendi and Lipe, 1987; Lipe, 1990;
Pronobis et al., 2009, Frankel and Litov, 2009). The model (2) is presented as follows.
Et+1 = β0 + β1Et+ εit
(2)
Et+1 = basic earnings per share of firm i period t+1;
Et = basic earnings per share of firm i period t; and
εit = error term of firm i period t.
Model (2) is run by partitioning the sample into listed companies on the
Stock Exchange of Thailand (SET) and the Shanghai Stock Exchange (SSE) same as
model (1).
Adjusted R2 is used to measure how well of current earnings can explain
the future earnings. The significance of coefficient β1 is tested by t-statistics for listed
companies on each stock market (the SET and the SSE). Model (2) is run for pooledsample data period (the years 2005-2008) and yearly data for listed companies on each
stock market.
Similar to model (1), the difference level of earnings persistence between
Thailand and China are compared by testing the difference in correlations between the
current earnings and future earnings. The explanation of correlation test between current
earnings and future earnings will be discussed on section 3.3.3.
3.3.3 Tests of Difference between Independent Pearson Correlation
The paper set the research hypotheses that the accounting information
quality of listed companies on the SET and the SSE differ significantly.
First, the study tests the difference between Pearson correlation of returnearnings of listed companies on the SET and the SSE. It is the test of the difference in
value relevance of earnings between listed companies of two countries.
65
The steps of test the difference in Pearson correlation of return-earnings are
as follows.
1. Compute the Pearson correlation of return-earnings relation of listed
companies of the SET (r1) and the SSE (r2).
2. Compute p (probability value). It is the probability of obtaining a
difference between the statistic r1-r2.
r1 = Pearson correlation between return-earnings of listed companies
on the SET; and
r2 = Pearson correlation between return-earnings of listed companies
on the SSE.
Since the sampling distribution is not normal, the sample correlations
are transformed into Fisher’s z. The general formula applied to this transform is:
= the first correlation (correlation between return-earnings of
listed companies on the SET) which is transformed into Fisher’s z;
= the second correlation (correlation between return-earnings of
listed companies on the SSE) which is transformed into Fisher’s z;
= the standard error of the difference in Fisher’s z;
N1
= the sample size for the first correlation (numbers of listed
companies on the SET); and
N2 = the sample size for the second correlation (numbers of listed
companies on the SSE).
The z value which is calculated from the above formular is used to find
two-tailed probability value from z table. The probability is compared with the significant
level (0.05). If the probability value from z table is less than 0.05, the correlation between
return and earnings of listed companies on the SET differ from that of listed companies on
the SSE. Hence, the value relevance of earnings of two countries are different at 0.05
66
level. In the same manner, the probability of z table is also compared with the significant
level 0.01. The difference of Pearson correlation test is done both the pooled sample data
periods (years 2006-2008) and yearly data. Further, the one-tailed test is also examined
whether the correlation between return-earnings of one country is more than that of
another country. The probability value from z value is divided by 2 and then compared to
the significant level 0.05 level and 0.01 level.
In addition, it also tests the difference between Pearson correlation of
future earnings-current earnings of listed companies on the SET and the SSE. The steps of
test the difference in Pearson correlation of future earnings-current earnings are as
follows.
1. Compute the Pearson correlation of future earnings-current earnings
relation of listed companies of the SET (r1) and the SSE (r2).
2. Compute p (probability value). It is the probability of obtaining a
difference between the statistic r1-r2.
r1 = Pearson correlation between future-current earnings of listed
companies on the SET; and
r2 = Pearson correlation between future-current earnings of listed
companies on the SSE.
Since the sampling distribution is not normal, the sample correlations
are transformed into Fisher’s z. The general formula applied to this transform is:
= the first correlation (correlation between future earnings-current
earnings of listed companies on the SET) which is transformed
into Fisher’s z;
= the second correlation (correlation between future earningscurrent earnings of listed companies on the SSE) which is
transformed into Fisher’s z;
= the standard error of the difference in Fisher’s z;
67
N1 = the sample size for the first correlation (numbers of listed companies
on the SET); and
N2 = the sample size for the second correlation (numbers of listed companies
on the SSE).
The value of z which is calculated from the above formular is used to
find two-tailed probability value from z table. The probability is compared with the
significant level (0.05). If the probability value from z table is less than 0.05, the
correlation between current earnings and future earnings of the listed companies on SET
differ from that of listed companies on the SSE. Thus, the level of earnings persistence
between listed companies on the SET and the SSE differ significantly at 0.05 level. In the
same manner, the probability of z table is also compared with the significant level 0.01.
The difference of Pearson correlation test is done both the pooled sample data periods (the
years 2005-2008) and yearly data. Further, the study also examines the one-tailed test. It
is the test whether the earnings persistence of the listed companies in one country is more
than that of another country significantly. The probability from z table is divided by two
and then compared to the significant level 0.05 and 0.01.
68
CHAPTER 4
EMPIRICAL RESULTS
This study investigates the level of accounting information quality of the
listed companies on the Stock Exchange of Thailand (SET) and the listed companies on
the Stock Exchange of China (especially for the Shanghai Stock Exchange-SSE).
Accounting information quality is measured in term of the value relevance of earnings
and earnings persistence. The paper also compares the difference of the value relevance of
earnings and earnings persistence between listed companies on the SET and the SSE.
4.1 Sample Characteristics
The data of this study is obtained from the financial statements of listed
companies on the Stock Exchange of Thailand (SET) and the Shanghai Stock Exchange
(SSE) during the years 2005-2008 (for the earnings persistence investigation, earnings in
year 2005 is included in the model). The data used in the paper are Return index (RI),
stock price and earnings per share which are extracted from online database called Data
Stream. Return index is used to calculate the monthly return. Then, the yearly return is
calculated from twelve months compound return after two months of the end of the year
(See details in Chapter 3).
This study excludes the Non-December financial year-ended firms
controlling for the same accounting period. The paper also deletes the outlier by cutting
the extremes value of variables (+/- 1% of samples). Thus, the final sample composes of
1,222 firms-years for the Stock Exchange of Thailand (SET) and 2,339 firms-years for the
Stock Exchange of China (the Shanghai Stock Exchange-SSE). Table 4.1 presents the
detailed information of the sample characteristics.
Table 4.1 Sample Characteristics
Listed Companies on
Listed Companies on
the Stock Exchange of
the Shanghai Stock
Thailand (SET)
Exchange (SSE)
Numbers of Listed Companies
1,381 firms-years
2,528 firms-years
Less Non-December year ended
61 firms-years
87 firms-years
Less outlier and missing data
98 firms-years
102 firms-years
1,222 firms-years
2,339 firms-years
Sample Characteristics
Total numbers of samples
69
4.2 Empirical Results
In this section, it presents the descriptive statistics of variables and regression
results of model (1) and model (2) both pooled-periods of the study data and yearly data.
4.2.1 Descriptive Statistics of Variables
Table 4.2 presents the descriptive statistics of stock return, earnings per
share of listed companies on the Stock Exchange of Thailand (SET) and the Shanghai
Stock Exchange (SSE).
Table 4.2 Descriptive Statistics of Stock Return, Earnings per Share of Year t and
Earnings per Share of Year t+1 4
Panel A: Listed Companies on the Stock Exchange of Thailand (SET) (n=1,222)
Variables
Variable used
Mean
Std
Min
Max
in model
Stock Return
Model (1)
-0.05479
0.43490
-0.81005
2.51360
Earnings per Share
Model (1)
1.50227
3.10505
-4.98000
24.49000
Model (2)
1.50227
3.10505
-4.98000
24.49000
Model (2)
1.52063
2.76901
-4.08000
16.43000
of Year t
Earnings per Share
of Year t+1
Earnings per Share
of Year t
Panel B: Listed Companies on the Shanghai Stock Exchange (SSE) (n=2,339)
Variables
Variable used
Mean
Std
Min
Max
in model
Stock Return
Model (1)
0.55480
0.93688
-0.71371
3.90830
Earnings per Share
Model (1)
0.18253
0.33038
-1.50200
1.59700
Model (2)
0.18253
0.33038
-1.50200
1.59700
Model (2)
0.15043
0.27855
-1.31100
1.10000
of Year t
Earnings per Share
of Year t+1
Earnings per Share
of Year t
4
For the investigation of the value relevance, the returns are regressed with earnings in the same accounting
periods. However, for the investigation of earnings persistence, the earnings of year t+1 are regressed with
earnings of year t. Hence, the researcher uses earnings in year 2006 as dependent variables and earinings in
year 2005 as independent variables. In the same manner, we use earnings in year 2007, 2008 as dependent
variables and earnings in year 2006 and 2007 as independent variables, respectively.
70
In addition, Table 4.3 presents the SET Index and the SSE composite index
during the years 2006-2008.
Table 4.3 The Stock Exchange of Thailand Index (SET Index) and The Shanghai
Stock Exchange Composite Index (SSE Composite Index)
PANEL A: The Stock Exchange of Thailand Index (SET Index)
Stock Indices
2006
2007
2008
SET Index Year-End Close
679.84
858.10
449.96
SET Index Yearly-High
785.38
915.03
884.19
SET Index Yearly-Low
622.14
616.75
384.15
PANEL B: The Shanghai Stock Exchange Index (SSE Composite Index)5
Stock Indices
SSE Composite Index Year–End Close
2006
2007
2008
2,675.47
5,261.56
1,820.21
According to Table 4.2, the mean of stock return of listed companies on
the Stock Exchange of Thailand (SET) is negative while that of the Stock Exchange of
China (Shanghai Stock Exchange-SSE) is positive. The standard deviation of stock return
of listed companies on the SSE is more than that of listed companies on the SET. The
range between the minimum and maximum return of the SSE is more than the SET. The
volatility of stock return for listed companies on the SSE is more than that of the SET.
(see the standard deviation of return in Table 4.2). Table 4.3 indicates that the SET index
year-end close and the SSE Composite Index year-end close are lowest in year 2008. Both
SET and SSE are affected from the world financial crisis especially from the Subprime
situation in U.S. of year 2008. SSE composite index in year 2008 has the worst yearly
performance in its 18-year history dropping 65 percent from 5,261.56 at the beginning of
the year 2008.
In addition, earnings per share of year t+1 and year t of listed companies of
the SET are more than that of listed companies on the SSE. The volatility of earnings of
Thai listed firms is more than Chinese listed firms (see standard deviation value of
earnings of year t+1 and earnings of year t in Table 4.2) which is the opposite direction of
stock return. The range between minimum and maximum value of earnings per share of
year t+1 and year t of listed companies on the SET is also wider than the SSE.
5
SSE Fact Book does not contain the SSE Composite Index yearly high and low.
71
Table 4.4 presents Pearson correlation and Spearman rank correlation
between stock return and earnings per share of year t and Table 4.5 presents Pearson
correlation and Spearman rank correlation between earnings per share of year t+1 and
earnings per share of year t.
Table 4.4 Pearson Correlation and Spearman Rank Correlation between Stock
Return and Earnings per Share of Year t
Panel A: Listed Companies on the Stock Exchange of Thailand (SET) (n=1,222)
Stock Return
Stock Return
1.00000
Earnings per Share of Year t
0.35819***
Earnings per Share of Year t
0.20688***
1.00000
Pearson Correlation is upper right and Spearman Rank Correlation is lower left.
*
significant level at 0.1 for two-tailed test
**
significant level at 0.05 for two-tailed test
***
significant level at 0.01 for two-tailed test
Panel B: Listed Companies on the Shanghai Stock Exchange (SSE) (n=2,339)
Stock Return
Stock Return
1.00000
Earnings per Share of Year t
0.10058***
Earnings per Share of Year t
0.09605***
1.00000
Pearson Correlation is upper right and Spearman Rank Correlation is lower left.
*
significant level at 0.1 for two-tailed test
**
significant level at 0.05 for two-tailed test
***
significant level at 0.01 for two-tailed test
Table 4.5 Pearson Correlation and Spearman Rank Correlation between Earnings
per Share of Year t+1 and Earnings per Share of Year t
Panel A: Listed Companies on the Stock Exchange of Thailand (SET) (n=1,222)
Earnings per Share of
Earnings per Share of
Year t+1
Year t
Earnings per share of Year t+1
1.00000
0.82479***
Earnings per Share of Year t
0.76030***
1.00000
Pearson Correlation is upper right and Spearman Rank Correlation is lower left.
*
significant level at 0.1 for two-tailed test
**
significant level at 0.05 for two-tailed test
***
significant level at 0.01 for two-tailed test
72
Panel B: Listed Companies on the Shanghai Stock Exchange (SSE) (n=2,339)
Earnings per Share of
Earnings per Share of
Year t+1
Year t
Earnings per Share of Year t+1
1.00000
0.54258***
Earnings per Share of Year t
0.70279***
1.00000
Pearson Correlation is upper right and Spearman Rank Correlation is lower left.
*
significant level at 0.1 for two-tailed test
**
significant level at 0.05 for two-tailed test
***
significant level at 0.01 for two-tailed test
The results from Table 4.4 indicate that the correlations between stock
return and earnings per share of Thai listed companies are significant both for Pearson
and Spearman rank. This result is the same for Chinese listed companies. In addition, the
correlation between earnings per share of year t+1 and year t is examined. The findings in
table 4.5 also reveal that both Pearson and Spearman rank correlation are statistically
significant for listed companies on the SET and the SSE. The values of Pearson and
Spearman rank correlation between stock return and earnings per share of Thai listed
companies are more than those of Chinese listed companies. Similarly, values of Pearson
correlation and Spearman rank correlation between earnings per share year t+1 and year t of
Thai listed companies are more than those of Chinese listed companies, too.
4.2.2
Regression Results of Model (1) and Model (2)
The main’s objective of this study is to investigate the accounting
information quality in term of market-based perspective (value relevance of earnings) and
accounting-based perspective (earnings persistence). The study focuses on listed
companies on the Stock Exchange of Thailand (SET) and the Shanghai Stock Exchange
(SSE). For the market based-perspective, the relations between stock return and earnings
are investigated and the regression results of pooled-periods of the study (years 20062008) are presented in Table 4.6.
73
Table 4.6 Regression Results of Stock Return on Earnings per Share
Rit = α0 + α1 Eit + eit
Variables
Listed Companies on
Listed Companies on
the Stock Exchange of Thailand
the Shanghai Stock Exchange
(SET)
(SSE)
Coefficients
t-statistics
Coefficients
t-statistics
-0.09832
-7.26766***
0.50508
22.92154***
0.02898
7.38590***
0.27238
4.66498***
Constant
Eit
*
(1)
F=54.55150***
F=21.76201***
Adj.R2=0.04202
Adj.R2=0.00880
significant level at 0.1
**
significant level at 0.05
***
significant level at 0.01
n1 = 1,222 firms-years for listed companies on the Stock Exchange of Thailand (SET);
n2= 2,339 firms-years for listed companies on the Shanghai Stock Exchange (SSE);
Rit = 12 monthly return compounding after 2 months of the end of years;
Eit = basic earnings per share of firm i period t; and
eit = error term of firm i period t.
Table 4.6 shows the regression results of stock return on earnings during
the years 2006-2008 of listed companies on the SET and the SSE. The model (1) is
statistically significant at 0.01 level for listed companies on both stock markets.
The result indicates that earnings (α1) are positively and significantly
related to stock return at 0.01 level for listed companies on both stock markets. Hence,
earnings are value relevant information for listed companies on the SET and the SSE. The
adjusted R2 of Thai stock market is 4.202% while that of China stock market is 0.880%.
That is, earnings of listed companies on the SET can explain the variability in stock return
more than that of listed companies on the SSE. However, the test of statistically
significant difference of the return-earnings relationship will be presented in next section.
Further, for the accounting-based perspective, the association between
earnings per share of year t+1 and year t (earnings persistence) is examined and the
regression results are presented in Table 4.7.
74
Table 4.7 Regression Results of Earnings per Share of Year t+1 on Earnings per
Share of Year t 6
Et+1 = β0 + β1Et+ εit
Variables
(2)
Listed Companies on the
Listed Companies on
Stock Exchange of Thailand
the Shanghai Stock Exchange
(SET)
(SSE)
Coefficients
t-statistics
Coefficients
t-statistics
Constant
0.09587
1.67235*
0.08572
13.1408***
Et
0.92488
50.94881***
0.64355
31.2257***
*
F=2,595.78129***
F=975.04532***
Adj.R2=0.68001
Adj.R2=0.29409
significant level at 0.1
**
significant level at 0.05
***
significant level at 0.01
n1 = 1,222 firms-years for listed companies on the Stock Exchange of Thailand (SET);
n2= 2,339 firms-years for the listed companies on the Shanghai Stock Exchange (SSE);
Et+1 = basic earnings per share of firm i period t+1;
Et = basic earnings per share of firm i period t; and
εit = error term of firm i period t.
Table 4.7 indicates the regression results of earnings per share of year t+1 on
earnings per share of year t during the years 2005-2008. The model (2) is statistically
significant at 0.01 level with adjusted R2 68.001% for listed companies on the SET and
adjusted R2 29.409% for listed companies on the SSE. The result indicates that the earnings
of year t (β1) are positively and significantly related to earnings of year t+1 at 0.01 level for
listed companies on both stock markets. That is, earnings of listed companies on the SET
and the SSE have the persistence and predictability properties. The adjusted R2 of model (2)
of listed companies on the SET is more than that of listed companies on the SSE. Thus, the
earnings persistence of listed companies on the SET is more than that of the SSE. However, the
test of statistically significance of earnings persistence will be presented in the next section.
6
Earnings persistence is examined by using earnings per share of years 2005-2008. At the time of data
collection, earnings in year 2009 are unavailable. Thus, the researcher uses earnings in year 2006 as
depedendent variables with earnings in year 2005 as independent variables. Earnings in year 2007 and 2008
are also used as dependent variables and earnings in year 2006 and 2007 are used as independent variables,
respectively.
75
4.2.3 Test of the Difference in Pearson Correlation
The paper investigates whether there is the significant difference in Pearson
correlation of return-earnings relations between the listed companies on the SET and the SSE.
The test uses z statistics (see detailed in Chapter 3). The results are presented in Table 4.8.
Table 4.8 Test of the Difference in Pearson Correlation between Return and Earnings
per Share between Listed Companies on the SET and the SSE
Listed Companies on
Listed Companies on
Difference between
the Stock Exchange
the Shanghai Stock
(1) and (2)
of Thailand (SET)
Exchange (SSE)
(1)
(2)
Pearson
0.21
0.10
0.11
1,222
2,339
1,117
0.2132
0.1003
0.1129
correlation
Sample size
Fisher’s z
z = 3.20
Prob. of z (3.20) =
*
0.0026***
significant level at 0.1 for two-tailed test
**
significant level at 0.05 for two-tailed test
***
significant level at 0.01 for two-tailed test
= the first correlation (correlation between return-earnings of listed companies on the SET) which is
transformed into Fisher’s z;
= the second correlation (correlation between return-earnings of listed companies on the SSE) which is
transformed into Fisher’s z;
= the standard error of the difference in Fisher’s z;
N1 = the sample size for the first correlation (numbers of listed companies on the SET); and
N2 = the sample size for the second correlation (numbers of listed companies on the SSE).
The probability of z is less than 0.01 for two-tailed test. That is, there is the
significant difference in correlation between return-earnings of listed companies on the SET and
the SSE at 0.01 level. For the result of one-tailed test, the probability of z is less than 0.01, too.
76
That is, the correlation of return-earnings of listed companies on the SET is significantly more
than that of listed companies on the SSE. Value relevance of earnings of listed companies on
the SET is more than listed companies on the SSE significantly.
In addition, the study also investigates the difference in Pearson correlation
of earnings year t+1 and earnings year t between listed companies on the SET and the SSE.
The results are presented in Table 4.9.
Table 4.9 Test of the Difference in Pearson Correlation between Earnings per Share of
Year t +1 and Earnings per share of Year t between Listed Companies on the SET
and the SSE
Listed Companies on
Listed Companies on
Difference between
the Stock Exchange
the Shanghai Stock
(1) and (2)
of Thailand (SET)
Exchange (SSE)
(1)
(2)
Pearson
0.82
0.54
0.28
1,222
2,339
1,117
1.1568
0.6042
0.5526
correlation
Sample size
Fisher’s z
z = 15.64
Prob. of z (15.64) =
*
0.0000***
significant level at 0.1 for two-tailed test
**
significant level at 0.05 for two-tailed test
***
significant level at 0.01 for two-tailed test
= the first correlation (correlation between future earnings-current earnings of listed companies on
the SET) which is transformed into Fisher’s z;
= the second correlation (correlation between future earnings-current earnings of listed companies on
the SSE) which is transformed into Fisher’s z;
= the standard error of the difference in Fisher’s z;
N1 = the sample size for the first correlation (numbers of listed companies on the SET); and
N2 = the sample size for the second correlation (numbers of the listed companies on the SSE).
77
The probability of z is less than 0.01 for two-tailed test. That is, there is the
significant difference in correlation between earnings of year t+1 and year t of listed
companies on the SET and the SSE at 0.01 level. For the result of one-tailed test, the
probability of z is less than 0.01, too. That is, the correlation of earnings of year t+1 and
year t of listed companies on the SET is significantly more than that of listed companies on
the SSE. Earnings persistence of listed companies on the SET is more than listed companies
on the SSE significantly.
The findings of Table 4.8 and 4.9 indicate that the value relevance and
earnings persistence of listed companies on the SET are more than that of listed companies
on the SSE significantly. The plausible reason is that the difference of extent of IAS/IFRS
adoption between Thailand and China. The absence score from IAS and divergence score
from IAS of Thailand is 29 and 7, respectively. The absence score from IAS and divergence
score from IAS of China is 14 and 15, respectively (Ding et al., 2007). Thailand has higher
absence score than China while China has higher divergence score than Thailand. It
indicates that there are no specific accounting rules in Thailand more than that of China,
whilst China have the different accounting practices from IAS more than Thailand. The
difference of IAS/IFRS adoption will affect to the accounting information quality (Barth et
al., 2008).
In Thailand, Institute of Certified Accountants and Auditors of Thailand
(ICAAT) (Nowadays, it has been changed the name to The Federation of Accounting
Professions-FAP) has begun the announcement of IAS/IFRS adoption since the year 1999.
The new accounting framework and numerous new Thai Accounting Standards (TASs)
issued in this year. The FAP has revised Thai Accounting Standards continuously until
now. Hence, the financial statement users perceived that Thai Accounting Standards are in
line with the IAS/IFRS since 1999, although there are some distinct differences with
IAS/IFRS. In year 2007, many TASs are in line with IAS/IFRS substantially for such Thai
Accounting Framework, TAS No.31 (revised 2007) Inventories (IAS No.2), TAS No. 35
(revised 2007) Presentation of Financial Statements (IAS No.1), TAS No.43 (revised 2007)
Business Combination (IFRS No.3), TAS No.44 (revised 2007) Consolidated and Separate
Financial Statements (IAS No.27), TAS No.45 (revised 2007) Investments in Associates
(IAS No.28), TAS No.46 (revised 2007) Interests in Joint Ventures (IAS No.31) (see
detailed in Chapter 2). These new revised accounting standards are become effective on
January 1, 2007, but some of them are effective on January 1, 2008.
78
In China, Chinese Accounting Standards (CASs) were largely replaced by
the International Financial Reporting Standards (IFRSs), bring China more in the line with
rest of the world since the year 2006. The new accounting standards (Accounting Standards
for Business Enterprises: ASBEs) become effective on at the beginning of year 2007. The
ASBEs (as shown in Chapter 2) cover almost all of the major topics found in literature with
some notable exceptions, as have been applicable to all Chinese listed companies. Because
ASBEs are new accounting standards for listed firms, firms undergoing transition to the
new accounting system may find it difficult to present a true a picture if the impact of
change, at least in short term. This has the potential to provide the misleading information
to shareholders in the form of incorrect financial reporting. It is imperative for persistent
market confidence that firms are able to communicate their true performance to
shareholders. In addition, Wu and Wang (2009) explore the characteristics of low quality
firms represented by the restatement firms. They find that a significant proportion of listed
companies on the SSE restated their annual reports for the years 1999-2005. Their findings
indicate that the accounting creditability of the listed companies in China has low value,
providing low quality of financial information bear little cost, since various market
mechanism fails to deter such behavior.
In addition, the result of this paper is also consistent with the findings of Ball
et al. (2000). Earnings in common law are more volatile, more informativeness, and more
closely-followed by investors and analysts. Earnings in code law country are more likely to
be less emphasis on timely recognition of losses in financial statements and earnings have
lower volatility and lower informativeness. Thailand is a common law country whilst China
is a code law country. Thus, value relevance of earnings of listed companies on the SET is
more than that of the SSE.
Furthermore, the findings of the paper are also consistent with Atwood et al.
(2010). They find that earnings have lower earnings persistence and a lower association
with future cash flows when the level of book-tax conformity is higher. They also suggest
that the increased in book-tax conformity may reduce earnings quality. The level of booktax conformity in China is higher than Thailand. Therefore, earnings persistence of listed
companies on the SSE is less than that of listed companies on the SET significantly.
79
4.2.4 Additional Test: Regression Results Model (1) for Yearly Data
The paper investigates the relationship between stock return and earnings
per share in each year of listed companies on the SET and the SSE. Descriptive Statistics
of the regression variables are presented in Table 4.10.
Table 4.10 Descriptive Statistics of Return and Earnings per Share for Yearly Data
PANEL A: Listed Companied on the Stock Exchange of Thailand (SET)
Variables
Mean
Std.
Min
Max
Year 2006
0.03870
0.44556
-0.80141
2.49640
Year 2007
0.13013
0.40829
-0.69795
2.51360
Year 2008
-0.33318
0.28726
-0.81005
0.63218
Year 2006
1.41540
2.70750
-4.57
14.91
Year 2007
1.54983
3.19228
-4.84
24.49
Year 2008
1.54051
3.37840
-4.98
17.98
Return
EPS
PANEL B: Listed Companies on the Shanghai Stock Exchange (SSE)
Variables
Mean
Std.
Min
Max
Year 2006
1.11928
0.72596
-0.29049
3.90830
Year 2007
1.02533
0.68518
-0.14363
3.80100
Year 2008
-0.47938
0.16593
-0.71371
0.73164
Year 2006
0.12574
0.29381
-1.502
1.597
Year 2007
0.24294
0.30661
-1.433
1.398
Year 2008
0.17867
0.37478
-1.492
1.579
Return
EPS
The means of stock return are positive in years 2006-2007 for listed companies
on the SET and the SSE, while the means of stock return of both stock markets are negative in
year 2008. The result is consistent with the SET Index and the SSE Composite Index presented
in Table 4.3. In year 2008, Asian stock markets collapse for all countries since the effects of
Subprime loan situation from U.S. Mean of stock return of listed companies on the SET of year
2007 is more that that of year 2006, while that of listed companies on the SSE in year 2007
declines from year 2006. Standard deviations of return of listed companies on the SSE are more
those of the SET in the years 2006-2007, but the opposite directions are found in year 2008.
80
Listed companies on both stock exchanges have the lowest earnings per share (EPS) in year
2006. EPS of listed companies on the SET and the SSE are the highest in year 2007. EPS in
year 2008 decreases from year 2007 for both stock exchanges. The standard deviations of EPS
of listed companies on the SET are more than that of the SSE for all years. The trend of changes
in EPS between years 2006-2008 is the same for listed companies on both stock markets. The
range of earnings per share (the difference between the maximum and minimum earnings per
share) for listed companies on the SET is wider than that of listed companies on the SSE.
The regression results of yearly data between return and earnings per share
are presented in Table 4.11.
Table 4.11 Yearly Regression Results of Stock Return on Earnings per Share
Rit = α0 + α1 Eit + eit
(1)
Panel A: Listed Companies on the Stock Exchange of Thailand (SET)
Year 2006
Variable
Coefficient
t-stat
Year 2007
Coefficient
Year 2008
t-stat
Coefficient
t-stat
-0.00983
-0.40135
0.08051 3.70458
-0.36979
-24.60515***
Eit
0.03429
4.27133***
0.03202 5.22264***
0.02377
5.86534***
Adjusted R2
0.04103
0.06037
0.07585
27.27594***
34.40227***
410
408
Constant
18.24426***
F
n
404
Panel B: Listed Companies on the Shanghai Stock Exchange (SSE)
Variable
Year 2006
Coefficient
t-stat
Year 2007
Coefficient
t-stat
Year 2008
Coefficient
t-stat
Constant
1.06070
38.12343***
0.94403 30.49577***
-0.50118
-79.14869***
Eit
0.46590
5.34864***
0.33465
4.22735***
0.12198
7.99413***
Adjusted R2
0.03431
0.02117
0.07472
F
28.60796***
17.87052***
63.90605***
n
778
781
780
*
significant level at 0.1
**
significant level at 0.05, *** significant level at 0.01
n = numbers of listed companies on the SET and the SSE for each year;
Rit = 12 monthly return compounding after 2 months of the end of years;
Eit = basic earnings per share of firm i period t; and
eit = error term of firm i period t.
81
The regression results of relationship between stock return and earnings are
presented in Table 4.11. Panel A indicates the regression results of listed companies on the
SET. Model (1) is statistically significant at 0.01 level for the year 2006, 2007, 2008 with
adjusted R2 4.103 %, 6.037%, 7.585%, respectively. Adjusted R2 increases throughout the
years 2006-2008. Earnings per share are positively and significantly related to stock return
for each year. That is, earnings are value relevant information for listed companies on the
SET. The highest adjusted R2 is found in year 2008. Some of Thai Accounting Standards in
year 2006 (such as TAS No. 34 Accounting for Trouble Debt Restructuring) are followed
the U.S.GAAP, some of them are in the line with IAS/IFRS. This will make the difficult
comparability of Thai’s financial statements with other foreign countries’ financial
statements. Hence, the value relevance of earnings in year 2006 is less than other years. The
clear direction of IAS/IFRS implementation in Thailand arises in year 2007. The Federation
of Accounting Profession (FAP) have been revised many Thai Accounting Standards with
in the line of IAS/IFRS in year 2007. However, in year 2008, the difference between TAS
and IAS/IFRS are still remained, but in the small magnitudes of difference than year 2006
and 2007. The adoption of IAS/IFRS will enhance the accounting information quality
(Barth et al., 2008). Thus, the highest value relevance of earnings of listed companies on the
SET is found in the year 2008.
Panel B shows the regression results of model (1) for listed companies on
the Shanghai Stock Exchange (SSE). Model (1) is also statistically significant at 0.01 level
for the year 2006, 2007, 2008 with adjusted R2 3.431%, 2.117% and 7.472%. Adjusted R2
decreases in year 2007, but increases in year 2008. Earnings per share are positively and
significantly related to stock returns for each year. That is, earnings are also value relevant
information for listed companies on the SSE. In year 2006, the adjusted R2 is higher than
year 2007 because the Ministry of Finance (MOF) in China announces the new Accounting
Standard for Business Enterprises (ASBEs) which are substantially in line with IFRS at the
beginning of year 2006 (see detailed in chapter 2). The market reacts this announcement as
the good news. The adoption of IAS/IFRS will enhance the quality of accounting
information (Barth et al., 2008). Although the application of new ASBEs will be effective
for financial statements beginning on January 1, 2007, but the adjusted R2 of year 2007
decreases with respect to year 2006. The plausible explanation is that the investors still have
unclear understanding about the new ASBEs. In year 2007-2008, the MOF have the issued
the batch of questions and answers on new ASBEs (see detail in Chapter 2) and also
82
announce the new interpretations of accounting standards in year 2008. Thus, the adjusted
R2 of return and earnings is the highest in year 2008. Value relevance of earnings of listed
companies on the SSE is the highest in year 2008 the same as the findings of listed
companies on the SET.
4.2.5 Additional Test: Regression Results Model (2) for Yearly Data
The paper investigates the relationship between earnings of year t+1 and
earnings of year t as the measure of earnings persistence for yearly data. Descriptive
statistics of the regression variables are presented in Table 4.12.
Table 4.12 Descriptive Statistics of Earnings per Share Year t+1 and Earnings per
Share Year t
PANEL A: Listed Companies on the Stock Exchange of Thailand (SET)
Variables
Mean
Std.
Min
Max
Year 2006
1.41540
2.70749
-4.57
14.91
Year 2007
1.54983
3.19228
-4.84
24.49
Year 2008
1.54051
3.37840
-4.98
17.98
Year 2005
1.53571
2.59217
-3.87
14.65
Year 2006
1.55419
2.78907
-4.08
16.43
Year 2007
1.47197
2.92029
-3.35
15.96
Earnings Year t+1
Earnings Year t
PANEL B: Listed Companies on the Shanghai Stock Exchange (SSE)
Variables
Mean
Std.
Min
Max
Year 2006
0.12574
0.29381
-1.502
1.597
Year 2007
0.24294
0.30661
-1.433
1.398
Year 2008
0.17867
0.37478
-1.492
1.579
Year 2005
0.07604
0.28488
-1.311
0.959
Year 2006
0.13955
0.26183
-1.255
1.090
Year 2007
0.23551
0.26530
-1.072
1.100
Earnings Year t+1
Earnings Year t
83
Mean of EPS year t+1 and EPS year t for all years (2005-2008) for listed
companies on the SET and the SSE are positive. None negative earnings are found in the
years 2005-2008. Interestingly, the standard deviations of earnings are more than means
of earnings for all years and for both two stock markets.
The range between the
minimum and maximum earnings of listed companies on the SET is wider than that of
listed companies on the SSE. Table 4.13 presents yearly regression results of earnings per
share of year t+1 on earnings per share of year t.
Table 4.13 Yearly Regression Results of Earnings per Share of Year t+1 on Earnings
per Share of Year t
Et+1 = β0 + β1Et+ εit
(2)
Panel A: Listed Companies on the Stock Exchange of Thailand (SET)
Variable
Year 2006
Coefficient
Year 2007
t-stat
Coefficient
Year 2008
t-stat
Coefficient
t-stat
Constant
0.14636
1.52605
0.01409
0.15443
0.15044
1.38848
Eit
0.82635
25.93538***
0.98814
34.55541***
0.94436
28.47568***
Adjusted R2
0.62499
0.74471
672.64390***
F
n
0.66553
1,194.07664***
404
810.86420***
410
408
Panel B: Listed Companies on the Shanghai Stock Exchange (SSE)
Variable
Year 2006
Coefficient
Constant
0.08067
Eit
0.59280
Adjusted R2
0.32949
t-stat
Coefficient
9.03540***
***
19.56596
382.82664***
F
n
*
Year 2007
778
0.47719
0.69115 20.40579
0.72746
16.75567***
0.34750
0.26423
416.39638***
280.75263***
781
780
n = numbers of listed companies on the SET and the SSE for each year;
Et = basic earnings per share of firm i period t; and
εit = error term of firm i period t.
t-stat
0.00735
significant level at 0.01
Et+1 = basic earnings per share of firm i period t+1;
Coefficient
***
significant level at 0.05
***
t-stat
0.14649 14.85466***
significant level at 0.1
**
Year 2008
84
From Table 4.13, the regression result of model (2) for listed companies on
the SET are statistically significant at 0.01 level with adjusted R2 62.499%, 74.471% and
66.553% for the year 2006, 2007 and 2008, respectively.
The adjusted R2 is the most
highest in year 2007. The positive relations between earnings of year t+1 and earnings of
year t (β1) are positive and significant in all years. Earnings of the listed companies on the
SET have the persistence properties. They are useful in the prediction of future earnings.
The highest value relevance is found in year 2008, but the highest earnings persistence is
found in year 2007. Although in year 2008 TASs are more consisitent with IAS/IFRS
than year 2007, earnings persistence is not the same manner. The plausible reason may be
that the earnings are much affected by the changes in accounting standards for such as
TAS No.25 (revised 2007) Cash Flows Statement; TAS No.29 (revised 2007) Leases;
TAS No.31 (revised 2007) Inventories; TAS No.33 (revised 2007) Borrowings; TAS
No.35 (revised 2007) Presentation of Financial Statements; TAS No.43 (revised 2007)
Business Combination; TAS No.39 (revised 2007) Accounting Policies, Changes in
Accounting Estimates and Errors , TAS No.41 (revised 2007) Interim Financial Reporting
(revised 2007); TAS No.49 (revised 2007) Construction Contracts; and TAS No.51
Intangible Assets. Although these accounting standards are revised in 2007, but their
effective are beginning on January 1, 2008 or after. Thus, earnings in year 2008 have less
persistence than that of year 2007.
For the panel B, model (2) is statistically significant at 0.01 level for listed
companies on the SSE. This result is the same as Panel A. The positive relations between
earnings of year t+1 and earnings of year t (β1) are statistically significant in all years with
adjusted R2 32.949% in year 2006, 34.750% in year 2007 and 26.423% in year 2008.
That is, earnings of listed companies on the SSE also have the persistence properties and
earnings are useful in prediction of future earnings. Interestingly, the adjusted R2 of model
(2) is the highest in year 2007 same as listed companies on the SET. The MOF of China
had been announced the adoption of new ASBEs in year 2007. Investors perceive
earnings in year 2007 are useful in valuing their securities and the prediction of future
earnings more than before. In year 2008, the stock market in Asian including the SET and
the SSE are affected by the Sub-prime situation in U.S. Earnings volatility in year 2008
are higher than year 2007, thus earnings persistence of year 2008 are less than 2007. In
addition, the adjusted R2 of model (2) of listed companies on the SET are more than that
85
of listed companies on the SSE for each year (2006-2008). The test of difference of value
relevance of earnings and earnings persistence will be presented in next section.
4.2.6 Test of the Difference in Pearson Correlation between Listed
Companies on the SET and the SSE: Yearly data
The study tests the difference in correlation of return-earnings per
share for yearly data. The results are presented in Table 4.14.
Table 4.14 Test of the Difference in Pearson Correlation of Return and Earnings per
Share between Listed Companies on the SET and the SSE for Yearly Data
Listed Companies on
Listed Companies on
Difference
the Stock Exchange
the Shanghai Stock
between
of Thailand (SET)
Exchange (SSE)
(1) and (2)
(1)
(2)
Year 2006
Pearson
0.21
0.19
0.02
404
778
374
0.2132
0.1923
0.0209
0.25
0.15
0.10
410
781
371
0.2554
0.1511
0.1043
0.28
0.28
0.00
408
780
372
0.2887
0.2887
0.0000
correlation
Sample size
Fisher’s z
z = 0.34
Prob. of z (0.34) =
0.7338
Year 2007
Pearson
correlation
Sample size
Fisher’s z
z = 1.70
Prob. of z (1.70) =
0.0892*
Year 2008
Pearson
correlation
Sample size
Fisher’s z
z=0.00
Prob. of z (0.00) =
1.0000
86
*
significant level at 0.1 for two-tailed test
**
significant level at 0.05 for two-tailed test
***
significant level at 0.01 for two-tailed test
= the first correlation (correlation between return-earnings of listed companies on the SET) which is
transformed into Fisher’s z;
= the second correlation (correlation between return-earnings of listed companies on the SSE) which is
transformed into Fisher’s z;
= the standard error of the difference in Fisher’s z;
N1 = the sample size for the first correlation (numbers of listed companies on the SET); and
N2 = the sample size for the second correlation (numbers of listed companies on the SSE).
For the test of the difference in correlation of stock return-earnings per
share between listed companies on the Stock Exchange of Thailand (SET) and listed
companies on the Shanghai Stock Exchange (SSE) in each year, the results in Table 4.14
show that there are no statistically significant of correlation of stock return-earnings
between listed companies on the SET and the SSE in year 2006 and year 2008. However,
there is a statistically significant difference in correlation at 0.1 level (for two-tailed test)
between listed companies on the SET and the SSE. For one tailed test, the results of year
2006 and 2008 are the same. In year 2007, the probability of z value is 0.0446 for onetailed test which is significant at 0.05 level. That is, the correlation of return-earnings of
the listed companies on SET is more than that of the listed companies on SSE
significantly especially in the year 2007.
For the yearly analysis, the value relevance of earnings does not differ
between listed companies on the Stock Exchange of Thailand and the Shanghai Stock
Exchange in year 2006 and 2008. Nevertheless, the value relevance of earnings of listed
companies on the SET is more than that of listed companies on the SSE in year 2007.
In addition, the paper also tests the difference in Pearson correlation of
earnings of year t+1 and earnings of year t for yearly data. The results are presented in
Table 4.15.
87
Table 4.15 Test of the Difference in Pearson Correlation of Earnings per Share of
Year t+1 and Earnings per Share of Year t between Listed Companies on the SET
and the SSE for Yearly data
Listed Companies on
Listed Companies on
Difference between
the Stock Exchange
the Shanghai Stock
(1) and (2)
of Thailand (SET)
Exchange (SSE)
(1)
(2)
Year 2006
Pearson
0.79
0.57
0.22
404
778
374
1.0714
0.6475
0.4239
0.86
0.59
0.27
410
781
371
1.2933
0.6777
0.6156
0.82
0.51
0.31
408
780
372
1.1568
0.5627
0.5941
correlation
Sample size
Fisher’s z
z = 6.89
Prob. of z (6.89) =
0.0000***
Year 2007
Pearson
correlation
Sample size
Fisher’s z
z =10.06
Prob. of z (10.06) =
0.0000***
Year 2008
Pearson
correlation
Sample size
Fisher’s z
z = 9.69
Prob. of z (9.69) =
*
significant level at 0.1 for two-tailed test
**
significant level at 0.05 for two-tailed test
***
significant level at 0.01 for two-tailed test
0.0000***
88
= the first correlation (correlation between future earnings-current earnings of listed companies on
the SET) which is transformed into Fisher’s z;
= the second correlation (correlation between future earnings-current earnings of listed companies on
the SSE) which is transformed into Fisher’s z;
= the standard error of the difference in Fisher’s z;
N1 = the sample size for the first correlation (numbers of listed companies on the SET); and
N2 = the sample size for the second correlation (numbers of listed companies on the SSE).
For the test of the difference in correlation of earnings year t+1 and year t
between listed companies on the Stock Exchange of Thailand (SET) and the Shanghai
Stock Exchange (SSE) in each year, the results show that there are statistically significant
at 0.01 level (for two-tailed test) for the year 2006, 2007 and 2008. That is, there are the
differences in correlation of earnings year t+1 and earnings year t of listed companies on
the SET and the SSE in each year. For the one-tailed test, the results reveal that there are
the statistically significant at 0.01 level in each year, too. The correlation of earnings year
t+1 and earnings year t of listed companies on the SET is more than that of listed
companies on the SSE significantly.
For yearly analysis, the results can be summarized that earnings
persistence of listed companies on the SET is more than that of listed companies on the
SSE. The predicitability properties of earnings of listed companies on the SET are better
than that of listed companies on the SSE in all years.
89
CHAPTER 5
CONCLUSIONS AND IMPLICATION
5.1 Conclusions
The paper investigates the value relevance of earnings and earnings
persistence of listed companies on the Stock Exchange of Thailand (SET) and the
Shanghai Stock Exchange (SSE). The study also compares the difference in value
relevance of earnings and earnings persistence of the listed companies of both stock
markets. The years of study are 2006-2008 for value relevance test (years 2005-2008 for
earnings persistence test). The results indicate that earnings are related to stock returns
significantly in both stock markets. The findings are consistent to the prior research
(Kothari, 2001; Barth et al., 2008). Thus, earnings are value relevant information which
investors use them in valuing their securities. In addition, the findings of the paper also
reveal that there are the significant difference in correlation between return-earnings of
listed companies on the SET and the SSE. The correlations of return-earnings of listed
companies on the SET are more than that of listed companies on the SSE. Hence, the
value relevance of earnings of the Thai listed firms is more than that of Chinese listed
firms significantly for pooled-periods of the study (years 2006-2008). In addition, the
current earnings and future earnings are significantly related for listed companies on both
stock exchanges. Earnings have the persistence and predictability properties for listed
companies on the SET and the SSE. The correlations between the future earnings and
current earnings of listed companies on the SET are more than that of listed companies on
the SSE. That is, earnings persistence of listed companies on the SET is more than that of
listed companies on the SSE for pooled-periods of the study (years 2005-2008). In the
cross-sectional analysis, the results indicate that accounting information quality of
Thailand is more than that of China significantly. The plausible reason is the difference of
the extent of IAS/IFRS adoption. In Thailand, the Federation of Accounting Profession
(FAP) has begun the adoption of IASs/IFRSs since the year 1999 while Chinese
Accounting Standards (CASs) were largely replaced by IASs/IFRSs since the year 2006.
The new Accounting Standards for Business Enterprises (ASBEs) in China becomes
effective on January 1, 2007. Because the ASBEs are new standards and firms are in the
transition period with the changes in many accounting standards. Therefore, the value
relevance and earnings persistence of listed companies on the SSE are less than that of
90
listed companies on the SET significantly. The result is also consistent with the effects of
the level of book-tax conformity on the accounting information quality (Atwood et al.,
2010). China has the higher book-tax conformity level than Thailand; hence the earnings
persistence of China is lower than Thailand.
Further, the study also investigates the value relevance and earnings
persistence of listed companies on the SET and the SSE for yearly data. The value
relevance of earnings is highest in year 2008 for listed companies on the SET because
FAP have been revised many TASs which are substantially in line with IASs/IFRSs since
year 1999. However, many TASs are revised along the line with IAS in year 2008 for
such as TAS 29 (revised 2007) Leases, TAS 31 (revised 2007) Inventories, TAS 43
(revised 2007) Business Combination and TAS 51 Intangible Assets. Similarly, the
highest value relevance of earnings of listed companies on the SSE is found in year 2008.
Although the new Accounting Standards for Business Enterprises (ASBEs) in China
become effective since the year 2007, the financial statement users have unclear
understanding of new accounting standards. The MOF in China continuously issue the
batches of question and answers in year about the new accounting standards in years
2007-2008. More interpretations have been issued out in year 2008. Thus, value relevance
of earnings is highest in year 2008 for Chinese listed firms.
The earnings persistence is also examined for yearly data. Earnings have
persistence properties for listed companies on the SET. The highest adjusted R2 is found
in year 2007. Although the highest value relevance is found in year 2008, but the highest
earnings persistence is found in year 2007. The plausible reason is that earnings are
affected by the changes in accounting standards in year 2008; for example, the exclusion
of the extraordinary item in income statement. Thus, earnings persistence in year 2008 is
less than year 2007 in Thailand. The results of earnings persistence of listed companies on
the SSE are the same as the SET. The highest earnings persistence is found in year 2007,
while the highest value relevance is found in year 2008. The results may be the effects of
Asian Stock market which are received the effects from the U.S. Stock market especially
for Sub-Prime loan situation in U.S. The earnings volatility in year 2008 in China is more
than year 2007. Thus, earnings persistence of year 2008 is less than year 2007 in China, too.
The paper also compares the difference of value relevance of earnings
and earnings persistence between listed companies on the SET and the SSE for yearly
data. The test of difference in Pearson correlation between return and earnings shows that
91
value relevance of earnings of listed companies on the SET is more than that of the SSE
especially in the year 2007. In year 2006 and 2008, the value relevance of earnings of the
listed companies on the SET is more than the SSE but they are insignificant. However, for
the test of the difference in earnings persistence, the findings show that the earnings
persistence of listed companies on the SET is more than that of the SSE significantly in
year 2006, 2007 and 2008.
5.2 Implication
This study offers the academic researchers, regulators and investors for
both domestic and international-insights into overall quality of Thailand’s and China’s
accounting information along with a further understanding of Thailand’s and China’s
increasing important capital markets and accounting regulatory rules in two countries.
5.3 Limitation
The results are based on the study periods (years 2006-2008 for value
relevance test and years 2005-2008 for earnings persistence test). If the study extends to
another period, the results of research may be change. The qualities of accounting
information in this study are measured in term of the value relevance and earnings
persistence. Other measures of accounting information qualities can give the different
results.
5.4 Suggestion
5.4.1 Suggestion of the Study
The findings of paper will directly contribute to the accounting standard
setters of each country (Thailand and China). Accounting standard setters can set the
appropriate accounting rules and set the level of implementation of IAS/IFRS to improve
the accounting information quality. The results of this study indicate that value relevance
of earnings and earnings persistence of listed companies on the SET are more than that of
the SSE for the pooled-periods of the study. The extent of implementation of IAS/IFRS of
Thailand is more than that of China. That is, the adoption of IAS/IFRS will increase value
relevance of earnings and improve earnings persistence. This will provide the important
guidelines to set standards by adopt IAS/IFRS as the domestic accounting standards or
use IAS/IFRS as the principle for issuing the domestic accounting standards. In addition,
92
the paper will provide the methods for investigation of accounting information quality.
It will be useful for the regulators of both countries in investigation of accounting
information quality.
5.4.2 Suggestion for Future Research
Future research can be extended to investigate the accounting information
quality in other countries in Asian for such as Hong Kong, Malaysia, Singapore. In
addition, the accounting information quality can be measured in other perspectives for
such as level of earnings management, timeliness of earnings, level of conservatism, the
financial report disclosure index.
93
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97
APPENDIX A
Figure 1 Research Conceptual Diagram
The
Adoption of
IAS/IFRS
Legal
Systems
Book-tax
conformity
Level of Accounting
Information Quality
Value Relevance
of Earnings
Level of
Earnings
Persistence
98
APPENDIX B
FAP Announcement No.12/2552
Numbering of Thai Accounting Standards (TASs) along the line with numbers of
International Accounting Standards (IASs) and International Financial Reporting
Standards (IFRSs)
International Accounting Standards
Thai Accounting Standards
Thai Accounting
(New Numbers)
Standards
(Previous
Numbers)
No.
IAS 1
No.
Presentation of Financial
TAS 1
Statements
IAS 2
Inventories
No.
Presentation of
TAS 35
Financial Statements
TAS 2
Inventories
TAS 31
(Revised 2007)
IAS 7
Cash Flow Statements
TAS 7
Cash Flow Statements
TAS 25
IAS 8
Accounting Policies,
TAS 8
Accounting Policies,
TAS 39
Changes in Accounting
Changes in Accounting
Estimates and Errors
Estimates and Errors
(Revised 2007)
IAS 10
Events after the Balance
TAS 10
Sheet Date
Events after the
TAS 52
Balance
Sheet Date (Revised
2006)
IAS 11
Construction Contracts
TAS 11
Construction Contracts
TAS 49
(Revised 2007)
IAS 12
Income Taxes
TAS 12
Income Taxes
IAS 14
Segment Reporting
TAS 14
Segment Reporting
TAS 24
IAS 16
Property, Plant and
TAS 16
Property, Plant and
TAS 32
Equipment
-
Equipment(Revised
2007)
IAS 17
Leases
TAS 17
Leases (Revised 2007)
TAS 29
99
International Accounting Standards
Thai Accounting Standards
Thai Accounting
(New Numbers)
Standards
(Previous
Numbers)
No.
No.
No.
IAS 18
Revenue
TAS 18
Revenue (Revised 2007)
IAS 19
Employee Benefits
TAS 19
Employee Benefits
-
IAS 20
Accounting for
TAS 20
Accounting for
-
IAS 21
IAS 23
Government Grants and
Government Grants and
Disclosure of
Disclosure of
Government Assistant
Government Assistant
The Effects of Changes
TAS 21
The Effects of Changes
in Foreign Exchange
in Foreign Exchange
Rates
Rates (Revised 2007)
Borrowings
TAS 23
Borrowings
TAS 37
TAS 30
TAS 33
(Revised 2007)
IAS 24
Related Party Disclosures TAS 24
Related Party
TAS 47
Disclosures (Revised
2007)
IAS 26
IAS 27
Accounting and
TAS 26
Accounting and
Reporting by Retirement
Reporting by Retirement
Benefits Plans
Benefits Plans
Consolidated and
TAS 27
Consolidated and
Separate Financial
Separate Financial
Statements
Statements (Revised
-
TAS 44
2007)
IAS 28
Investments in
TAS 28
Associates
Investments in
TAS 45
Associates (Revised
2007)
IAS 29
Financial Reporting in
TAS 29
Financial Reporting in
Hyperinflationary
Hyperinflationary
Economics
Economics
-
100
International Accounting Standards
Thai Accounting Standards
Thai Accounting
(New Numbers)
Standards
(Previous
Numbers)
No.
IAS 30
No.
Disclosures in the
TAS 30
No.
Disclosures in the
Financial Statements of
Financial Statements of
Banks and Similar
Banks and Similar
Financial Institution
Financial Institution
TAS 27
(Revised 2006)
IAS 31
Interests in Joint Ventures
TAS 31
Interests in Joint
TAS 46
Ventures
(Revised 2007)
IAS 32
Financial Instruments
TAS 32
Presentation
Financial Instruments
TAS 48
Presentation
(Revised 2007)
IAS 33
Earnings per Share
TAS 33
Earnings per Share
TAS 38
(Revised 2007)
IAS 34
Interim Financial
TAS 34
Reporting
Interim Financial
TAS 41
Reporting
(Revised 2007)
IAS 36
Impairment of Assets
TAS 36
Impairment of Assets
TAS 36
(Revised 2007)
IAS 37
Provisions, Contingent
TAS 37
Provisions, Contingent
Liabilities, and Contingent
Liabilities, and
Assets
Contingent Assets
IAS 38
Intangible Assets
TAS 38
Intangible Assets
IAS 39
Financial Instruments:
TAS 39
Financial Instruments:
Recognition and
Recognition and
Measurement
Measurement
TAS 53
TAS 51
-
IAS 40
Investment Property
TAS 40
Investment Property
-
IAS 41
Agriculture
TAS 41
Agriculture
-
101
International Financial Reporting
Thai Financial Reporting
Thai Accounting
Standards
Standards
Standards
(New Numbers)
(Previous
Numbers)
No.
IFRS 1
No.
First-Time Adoption of
TFRS 1
No.
First-Time Adoption of
International Financial
International Financial
Reporting Standards
Reporting Standards
IFRS 2
Share-based Payment
TFRS 2
Share-based Payment
IFRS 3
Business Combinations
TFRS 3
Business Combinations
-
TAS 43
(Revised 2007)
IFRS 4
Insurance Contracts
TFRS 4
Insurance Contracts
-
IFRS 5
Non-current Assets Held
TFRS 5
Non-current Assets
TAS 54
for sale and Discontinued
Held for sale and
Operations
Discontinued
Operations (Revised
2007)
IFRS 6
IFRS 7
Exploration for and
TFRS 6
Evaluation of Mineral
Evaluation of Mineral
Resources
Resources
Financial Instruments:
TFRS 7
Disclosures
IFRS 8
Exploration for and
Operating Segments
Financial Instruments:
-
-
Disclosures
TFRS 8
Operating Segments
-
Sources: The Federation of Accounting Professions. FAP Announcement 12/2552.
Retrieved January 2, 2011 from http://www.fap.or.th/subfapnews.php?id=6.
102
BIOGRAPHY
Assistant Professor Dr. Kittima Acaranupong received her Doctoral
Degree in Accountancy, and her Master Degree in Accountancy from Chulalongkorn
University, and her Bachelor Degree in Accountancy (First Class Honors) from
Thammasat University.
Now she is a lecturer at School of Accountancy, University of the Thai
Chamber of Commerce. Her main interests are financial accounting, managerial
accounting, and international accounting. Her current research includes performance
measurement, value relevance of accounting information, accounting information quality,
and earnings management.