Valuation of fair value caused by K-IFRS(Korea International Financial
Reporting Standards) adoption more facilitates discretion and
interpretation of executive through change to the principle-based
standards. Past K-GAAP(Korea Generally Accepted Accounting Principles)
was pointed out about problems with incomplete impairment regulation
of asset. While the current K-IFRS provides specific guidance with
respect to asset impairment loss, it is required to the judgment of
executive in the accounting regulations such as the determination of the
cash-generating unit and measuring recoverable amount. Due to the
permitted discretion of executive in the accounting regulation, managers
have a private incentive to take advantage of asset impairment loss,
and are potentially able to abuse untested measuring recoverable
amount.
If the judgment of management is irresistibly applied to asset
impairment decisions, firms need a device that can mitigate opportunistic
behavior to monitor and supervise to private incentive of manager.
Today''s firms to be important on sustainability management and
corporate social responsibility are emphasized on that corporate
governance of the stakeholder must be established beyond corporate
governance of the shareholder.
An objective of this paper is to investigate the effect of corporate
governance on discretion of asset impairment recognition and accruals
management for KOSPI and KOSDAQ listed companies in the Korean
securities market from 2007 to 2013. First, this study confirms whether
manager use for concurrent earning management using asset impairment
loss and discretionary accruals, and then examines that the effect of
corporate governance on concurrent earning management.
The main empirical results are summarized as follows. First, the
hypotheses 1-1’s result appeared that concurrent negative relevance
between asset impairment loss and discretionary accruals in both the
KOSPI and KOSDAQ companies after remove of the concurrency
problem. Second, the hypotheses 1-2’s result appeared that concurrent
negative relevance between discretionary asset impairment loss and
discretionary accruals in both the KOSPI and KOSDAQ companies after
remove of the concurrency problem. Third, the hypotheses 2 of this
study analyzed the role of corporate governance on concurrent earning
management using asset impairment loss and discretionary accruals.
Results, the corporate governance alleviates concurrent negative
relevance between discretionary asset impairment loss and discretionary
accruals in only KOSPI firms having good governance. It is considered
that KOSDAQ companies have short firm years and insufficient
corporate governance caused by free entry and exit to the market
unlike KOSPI companies, Thus, in the case of KOSDAQ companies it
suggests the need for regulation and management of the Government
and auditor to ensure proper corporate governance structures. Also, this
study additionally robust tested for main empirical results.
The results of this study provide significant implication to manager,
employees and all stakeholders of the company as well as outside
investors. Firms get to build a positive corporate governance to
enhance fiscal transparency for private incentive in pursuit of manager
when recognize asset impairment loss. Therefore, this study expect that
establishing good governance for accounting transparency and investor
protection can be sufficient containment device to the executive
pursuing private incentives.
This paper has limitation such as the omitted variable problem, the
measurement error as regards the measurement process of discretional
asset impairments but has differentiation as compared with prior studies
which we separate discretional asset impairments from economic factors
and real Firm performance factors. Second, corporate governance
variable of the stakeholder theory did not consider the specific weight
by corporate governance factors.