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Mad Deen

on 19 May 2014

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Creative Accounting Defines..
Techniques (continues)..
Creative accounting could be either;

Positively viewed:
Accounting practice that benefits companies and their investors

Negatively viewed:
Manipulative practice that mislead their investors.
Accounting practices that follow required laws and regulations, but deviate from what those standards intend to accomplish. Creative accounting capitalizes on loopholes in the accounting standards to falsely portray a better image of the company. Although creative accounting practices are legal, the loopholes they exploit are often reformed to prevent such behaviors.
A process whereby accountants use knowledge of accounting rules to manipulate figures reported in the accounts of a business (Blake, Amat & Dowds, 1998)

Income smoothing
Inflated revenues
Present extraordinary items either as income or expenses
Off balance sheet financing
Changes in Depreciation Policy
To report higher profits, create reserves and use the same reserves for payment of bonus, which is lower the depreciation charges
Revenue Recognition (Inflated Revenue)
Non-existent revenue being recognized based on the fake invoices, raised by the company to report higher profits
Capitalizing R&D ( Revenue Expenses)
Revenue expenditure treated as R&D expenditure and capitalized to report better profit.

After objective of reporting a rosy picture achieved, the amount was reversed and charged to Profit & Loss account.
The company whose shares were to be acquired was valued using the method (Discounting the Future Cash Flows) most suited to the acquirer.

This investment was written off after a couple of years while the company from whom shares were acquired made huge profits.
Big Bath Charges
New managers may charge expenses as much as possible in the current period to ensure any losses appear as the responsibility of the previous manager
Cookie Jar Reserves
Over-provisioning for accrued expenses when revenues are high helps to bring down profits to a level that is safe to maintain in the future.

Similarly, failure to provide all the accrued expenses can help show larger profits during tougher times when such is the need of the hour.
Off Balance Sheet Financing
The firm arranges financing for the firm's assets with financial institution and apply creative accounting tehnique by either not disclosing the transactions in the balance sheet or to present such transaction in such a manner as to obscure the true commercial significance


Other Techniques
Creative Acquisition Accounting
Round trip
Fake revenue & reserves depletion
Off balance sheet;
Reversal of actual expenses
Litigation settlement
Inventory shrink
"Dead deal"- non write off asset
Most of the companies use this "creative accounting" to achieve financial interest either only for some interested parties or for the all stakeholders.

Creative accounting have its effect mostly to the shareholders, future investors, creditors, governments and perception of the people itself.

Thus, understanding the techniques, the knowledge for detection of creative accounting and how to reduce its impact is very important to the most users of the company's financial statement.
FAR 600
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