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Finance accounting on earning management - Assignment Example
The first part of the paper examines the incentives of managers to undertake earning management. It examines the techniques used by managers and the motives for it. The section will also examine the concept of channel stuffing and cookie jar accounting as techniques for earning management…
The second part of the paper would answer questions relating to impairment of assets. It will involve a critique of the circumstances under which impairment is declared. It will also explain when companies must perform impairment reviews and examine a practical case of impairment my Peugeot-Citroen and Vodafone.
A. Managers' Incentive for Earning Management.
“Earning management occurs when managers use judgement in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reporting accounting numbers” (Rowen and Yaari, 2009: 26). This implies that earning management is centred around the fact that a firm's directors and managers might want to present information in a way and manner that is not true nor accurate.
Earning management is sometimes called disclosure management and creative accounting. It includes the use of approaches and systems to disclose accounting information in a way and manner that meets a defined end or objective (Alistair, 2008). Managers often have targets that are predetermined for them by the board of directors. This implies that they would have to work hard and do whatever is legally acceptable and possible to meet those objectives and standards.