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Measurement model of long-term equity investments

Author: XuZhiHan
Tutor: LiRuoShan
School: Fudan University
Course: Accounting
Keywords: long-term equity investment cost method equity method accounting choice
CLC: F224
Type: PhD thesis
Year: 2007
Downloads: 2194
Quote: 3
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Witha strong economic uprising, China’ s economy is becoming moremarket-driven. The process is speeding up and the investment activityis becoming more and more widespread, both for individuals and companies.Accounting information, as a means to facilitate investment decision,is increasingly becoming an important public goods. TheUnderstandability and usefulness of accounting information is criticalto the soundness of economic decision and distribution of scaredresource for the society as a whole. However, the accountingmeasurement of investment, especially long-term equity investment, isof relative complex because there exist two different accountingtreatments, namely cost method and equity method. Worse still, it isalso permitted to change from one method to another, causing confusionto accounting information users. Also, the valuation of investment candiffer, ranging from book value to market value. These differences willall undermine the understandability of the accounting informationgenerated as.such. Over the past decade, academics abroad devoted someefforts to the study of these issues, both normatively and empirically.In China, unfortunately, the research effort is so far fairly limited.Given the situation, this author attempts to address this issue withinthe Chinesesetting. From the usefulness of the accounting information,namely the information perspective and contract perspective, this studywill focus on the accounting measurement for long-term equity investment,with an analysis of market choice.In the first place, the thesis starts with a real company case, and then raises the accounting measurement issue involved. After that, ittraces the origin and evolution of cost method and equity method, withan intention to identify the Underlying reasons, improvement anddevelopment. Then, it analyses the nature and features of both costmethod andequity method, from legal, economic and accounting viewpoints.This author has come to the conclusion that both methods make sense withrelative advantages and disadvantages, both in theory and in practice.This is followed by applying empirical data to test the effect ofalternative accounting treatment on the proxy contract. The thesisargues that the current accounting standard has a system weaknesspermitting earning management. The empirical test using the data oflisted companies proved that equity method has more information value.This implies that equity method is favored by the market.This thesis has conducted a relatively comprehensive review andcomparison of cost method and equity method. Also, it has analyzed themeasurement issues under cost method and equity method, and empiricallytested the market reaction to the choice between the two. Theseanalyses provide some preliminary evidence which could help improveaccounting system and make an informed decision between them. Last,but certainly not least, this thesis can contribute to the further studyin the subject matter, with the hope that more enlightening researchwill follow.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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