The Comparison and Analysis about the Old and New Asset Impairment Accounting Standard *

The Comparison and Analysis about the Old and New Asset Impairment Accounting Standard * LIU Zhibin 1, YANG Yamei 2 1 Economics & Management Department, North China Electric Power University, Baoding, P.R.China, 071003 2 College of Economics and Trade, Agricultural University of Hebei, Baoding, P.R.China, 071001 liuzhibin771112@126.com Abstract This paper induced the characteristic of new asset impairment accounting standard based on the comparison of the old standard and the new standard. Through analyzing the related balance sheet and the income statement in the annual financial report of Guotou electric power company, we constructed the balance sheet and the income statement under the new standard. We carried on the financial analysis though intercepting the correlation data and calculating the index, and confirmed the difference between the new and the old asset impairment accounting standard. Key words Asset impairment, New accounting standard, Old accounting standard, Comparison and analysis 1 Introduction In recent years, with the increasing deepen of the economy marketability reform in China, the fast development of the financial market, the activities of the listed company are innovated unceasingly, the new accounting standards were born under this new development characteristic and the new request. On February 15, 2006, Ministry of Finance issued the accounting standard system including 1 basic standard and 38 concrete standards, which has the important meaning for improving the socialized market economy, raising the level of opening up, and accelerating to integrate the global economy. It is different from the recognition time, the recoverable amounts, the determination of impairment loss, and the accounting treatment etc., between the old and the new asset impairment accounting standard. Compared with the old standard, the new standard is operational, but it also has the deficiency in its implementation process. The related scholars also raised the question regarding this, and the theorists also have the dispute in the asset impairment's scope as well as the operation of impairment returns. The implementation of new standard has the huge fluctuation to the enterprise profit, and which has had the influence to financial reporting's user, some enterprises had the possibility to seize the chance to manipulate the profit simultaneously. Therefore, it has the important guiding sense that we conduct the deep research to the new standard. 2 The Comparison of Old and New Asset Impairment Accounting Standard 2.1 Definition comparison The definition of the asset impairment is the recoverable amount to be lower than their book value under the new standard and the old standard, but the old standard has not covered the asset scope and lacks the exhaustive practical guidance. When the enterprises carry out the old standard, it usually treats the assets as independence each other, such as inventory, fixed assets, intangible assets etc. In fact, when the enterprises make the asset impairment provision, they should relate the assets each other, otherwise this asset impairment can t be reflected accurately. On account of this situation, the new standard introduced the concept of asset group. When it is difficult to determine the asset impairment provision of the single asset, then we can determine the asset impairment according to related asset group definition. * This research was supported by the Scientific Research Foundation for Young Teachers of North China Electric Power University. The item No. is 200611037. 1278

2.2 Scope comparison In the applicable scope, the old standard pointed out that the enterprise must carry on the overall check regularly or at least in every year ending for the assets, they should estimate the possible occurred loss according to the conservatism principle, and make the asset impairment provision for the possible occurred loss. But for the measurement procedure and the method, the old standard only make the regulation for the eight assets, such as the accounts receivable, inventory, short-term investment, fixed asset, intangible asset, etc. The new standard has made the detailed stipulation to the asset impairment's scope; the suitable asset scope is mainly the fixed asset, the intangible asset and the long-term investment to the subsidiaries, associated company and the joint company and so on. 2.3 The asset impairment recognization comparison The old standard pointed out that the enterprise must carry on the overall check regularly or at least in every year ending for the assets, they should estimate the possible occurred loss according to the conservatism principle, and make the asset impairment provision for the possible occurred loss. The new standard stipulated the balance sheet date about the asset impairment test timing, and it stipulated that the enterprises should decide the assets whether to have the impairment sign. If the service life of the intangible assets is indefinite and the goodwill as a result of the enterprises merge, the enterprises must carry on the impairment test every year regardless of whether to have the impairment sign. If existing the impairment sign, we must estimate the recoverable amounts. 2.4 The recoverable amounts measurement comparison The new standard stipulated that the recoverable amounts of the asset is the greater of the net asset and the estimated discounted future cash flows, the net asset value equal to the fair value of asset minus the disposed expense. At the same time, the new standard provides the detailed guide for the measurement of net asset and the estimated discounted future cash flows. However, the recoverable amounts of the asset in the old standard are the greater of the sales net revenues and the discounted future cash flows coming from the persistent use and the disposed gains. Compared with the new standard, the old standard has not used the measurement attribute of fair value, and the old standard has not provided the exhaustive guide to the recoverable amounts measurement. 2.5 The asset impairment loss comparison About the determination of asset impairment loses, both the old accounting standard in China and the international accounting standard allowed to return the determined asset impairment lose, and this causes the artificial adjustment profit phenomenon to occur repeatedly using the impairment returns to occur repeatedly. For this reason, the new standard stipulated the impairment provision can not be returned. This policy will prevent the phenomenon of controlling the profits using the asset impairment provision returns, and make the financial statement information to be more objective. 2.6 Footnote disclosure comparison The old standard only requested the enterprise to disclose the asset impairment losses of determination and return in the period. This does not favor the decision-making of financial statement user obviously, and promote the profit controlling by making the secret preparation. Aimed at this situation, the new standard stipulated the amounts of asset impairment losses, the accumulation influence amounts, the reason, the procedure and the method. On the one hand, the scope of accounting policy choice and accounting estimation has been reduced; on the other hand, the disclosure scope has been expanded, and it is helpful to reduce the possibility of coloring the financial report. 3 Case Analysis 3.1 The related data of Guotou electric power company The stock code of Guotou electric power company is 600886, and the company goes on the market in the Shanghai stock market. This paper makes the related the balance sheet and the income statement 1279

according to the new asset impairment standard, and analyze the related data based on the balance sheet, income statement, income distributed statement and the attached statement in 2006. This accounts receivable has had the bad account reclamation, the fixed asset has had the impairment, the other asset has not had the impairment. Table 1 Main Item Data Amounts in Yuan Main item Ending balance under old standard Ending balance under new standard Accounts receivable, net 404,986,034.35 404,986,034.35 Total fixed asset 10,210,762,601.37 10,210,762,601.37 Fixed asset, net 7,468,543,527.35 6,822,448,888.12 Total asset 9,010,605,703.20 8,996,127,273.11 Shareholders equity 1,347,142,267.36 1,245,583,647.52 Total income 619,406,242.96 488,469,003.69 Net income 328,464,518.62 327,274,232.47 Main operation revenue 2,377,850,873.52 2,377,850,873.52 Main operation cost 1,522,572,226.01 1,522,572,226.01 The statement of changes in owners equity is as follows: Table 2 Statement of Changes in Owners Equity Amounts in Yuan Item Ending balance under old standard Ending balance under new standard Common stock 563,491,652.00 563,491,652.00 Additional paid-in capital 218,910,598.87 218,910,598.87 Legal surplus reserve fund 136,171,324.62 32,727,423.25 Legal public interest fund 70,177,271.25 16,363,711.62 Undistributed income 428,568,691.87 414,090,261.78 Total stockholders equity 1,347,142,267.36 1,245,583,647.52 3.2 Overall absolute quantity analysis According to the correlation data analysis, the total assets in this period of Guotou electric power company reduced 14,478,430.09 Yuan under the new standard, the total income reduced 130,937,239.27 Yuan, and the stockholders equity reduced 130,937,239.27 Yuan. At the same time, the net income reduced 1,190,286.15 Yuan. 3.3 Related financial analysis 3.3.1 Asset accumulation trend analysis 1280

Table 3 Asset Accumulation Trend Analysis Amounts in Yuan Item Under old standard Under new standard Total current asset 979,593,320.54 978,277,913.26 Fixed asset, net 6,835,611,910.93 6,822,448,888.12 Total asset 9,010,605,703.20 8,996,127,273.11 Analysis: Under the new accounting standard, the current assets reduced 115,407.28 Yuan, the net fixed asset reduced 1,363,022.81 Yuan, and the total asset reduced 14,478,430.09 Yuan. This is mainly resulted from the new standard stipulation that the asset impairment may not return in the later year. 3.3.2 Total income, net income trend analysis Table 4 Income Trend Analysis Amounts in Yuan Item Under old standard Under new standard Total income 619,406,242.96 488,469,003.69 Net income 328,464,518.62 327,274,232.47 Analysis: Compared with the old standard, the total income reduced 130,937,239.27 Yuan under the new standard; the net income reduced 1,190,286.15 Yuan. It is indicated that the influence under new asset impairment standard is obvious than under the old standard, but as a result of other factor's existence, the influence is not specially obvious to the net income. 3.3.3 Liquidity capacity analysis Table 5 Liquidity Capacity Analysis Current ratio 0.4679 0.4673 Current asset / Current liability Debt to total asset ratio 0.7329 0.7341 Debt/Asset Times-interest-earned 2.6617 2.0991 EBIT/Interest expense Analysis: Compared with the old standard, the current ratio reduced 0.05% under the new standard, the debt to total asset ratio elevated 0.12%, and the times-interest-earned reduced 56.26%. the influence of the new asset impairment standard to the liquidity capacity is not obvious. 3.3.4 Business efficiency analysis Table 6 Business Efficiency Analysis Receivables turnover 5.8714 5.8714 Sales on account/average accounts receivable Total assets turnover 0.2639 0.2643 Sales revenue/ Average total asset Analysis: With the implementation of new standard, it has not affected the business efficiency greatly. But compared to the value, the total asset turnover rate promoted 0.04%, the company's operating ability enhanced slightly. 3.3.5 Profitability capacity analysis 1281

Table 7 Profitability Capacity Analysis Sale profit percentage 0.2285 0.2137 Business income/sales revenue Return on net assets 0.2438 0.2627 Net income/shareholders equity Return on total assets 0.0365 0.0364 Net income/total asset Analysis: The influence of the new standard to the profitability capacity is not obvious in the overall. The sale profit percentage dropped 1.49% under the new accounting standard, but the return on net assets rose 2.6%. The change of return on total assets is not obvious, and it only dropped 0.01%. 4 Conclusion The new asset impairment standard not only affects company's asset, the total income, but also affects company's short-term credit ability, operating ability and. Compared with the old standard, the total asset and total income dropped obviously. Under the new standard, the asset impairment stipulation also has had the influence to the asset profit ability, the Guotou company's asset profit ability dropped comparing with the original level. Looking from the shareholder angle, the profit level dropped, this will affect company's creditworthiness and increase the difficulty of absorbing the investment. References [1]Li Ming. The Related Discussion about the Asset Impairment Standard in China. The Journal of Yangzhou University Taxation Institute, 2006, 6(2):53~55 [2]Li Yanlong, Zhang Yan. Research on Comparison of New and Old Asset Impairment Accounting Standard. Audit Monthly, 2006, 7(7):42~44 [3]Chen Min, Chen Jinyan. The Comparison and Analysis of New and Old Asset Impairment Accounting Standard. Chinese Chief Accountant, 2006, 5(5):56~57 [4]Sun Ou. The Comparison and Analysis of New and Old Asset Impairment Accounting Standard. Accountant Friend, 2006, 10(10): 77~78 1282