Earning Management

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Reading and Tutorial Questions:

 Reading:

Seminar 5

PART ONE: Managerial Incentives for Financial Management and the Role of Accounting Standards



HPH Chapter 5 (section 5.3) Choice by Preparers of Financial Statements

 Tutorial



questions:

Questions: 9, 11, 19, 21  Problems: 1, 2, 3

1

3

4

Lecture Outline:

 Financial



Availability of Choice

 The

 

existence of guidelines/rules for accountants in forms such as:

Corporations Act 2001; ASX Listing Rules; and  Accounting standards

Statement Management

Availability of choice  Types of choice  Explanations of choice (i.e. incentives)  Checks and Balances on Managers’ Opportunistic Behaviour

 Answering

has not eliminated choices that accountants have in relation to:

Recognition, Measurement, and  Disclosures policies to use.

 

Case studies

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6

Availability of Choice

 To

illustrate, assume an accounting system is entirely rule based, with no room for judgment. Such a system could specify that:



Availability of Choice

 Obvious

system?

 

problems with a rigid accounting

the allowance for doubtful debts is always 10% of receivables, equipment is depreciated straight line over 5 years, and all marketable securities are to be treated as if they were available for sale.

Providing rules for all facts and circumstances. New situations arise regularly (e.g., debt/equity hybrids, securitizations) requiring that new accounting rules be devised.



 In



short, accounting choice likely exists because it is impossible, or infeasible, to eliminate it

7

8

Availability of Choice

 Reflect



back on accounting for:

Revaluation  Impairment  Intangibles, and  Income taxes.

 What



Availability of Choice

 To

summarise, choices are available because:



There may be no coverage by an accounting standard/other regulation; Alternative policies are...