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    Earnings Management Earnings Management

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    SHAMRAIZKHAN
    This document provides an overview of earnings management, including: 1) Earnings management is the purposeful intervention in financial reporting to mislead stakeholders or influence contractual outcomes. There are two types: accrual-based and real earnings management. 2) Accrual-based earnings management exploits accounting discretion over accruals like depreciation rates. Real earnings management changes actual business decisions. 3) Common patterns of earnings management include big bath restructuring, cookie jar reserves, big bets like acquisitions, and shrinking the company through share repurchases.

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    Earnings Management Earnings Management

    Uploaded by

    SHAMRAIZKHAN
    20 views10 pages
    This document provides an overview of earnings management, including: 1) Earnings management is the purposeful intervention in financial reporting to mislead stakeholders or influence contractual outcomes. There are two types: accrual-based and real earnings management. 2) Accrual-based earnings management exploits accounting discretion over accruals like depreciation rates. Real earnings management changes actual business decisions. 3) Common patterns of earnings management include big bath restructuring, cookie jar reserves, big bets like acquisitions, and shrinking the company through share repurchases.

    Original Title

    Lect 13 CG

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    This document provides an overview of earnings management, including: 1) Earnings management is the purposeful intervention in financial reporting to mislead stakeholders or influence contractual outcomes. There are two types: accrual-based and real earnings management. 2) Accrual-based earnings management exploits accounting discretion over accruals like depreciation rates. Real earnings management changes actual business decisions. 3) Common patterns of earnings management include big bath restructuring, cookie jar reserves, big bets like acquisitions, and shrinking the company through share repurchases.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    20 views10 pages

    Earnings Management Earnings Management

    Uploaded by

    SHAMRAIZKHAN
    This document provides an overview of earnings management, including: 1) Earnings management is the purposeful intervention in financial reporting to mislead stakeholders or influence contractual outcomes. There are two types: accrual-based and real earnings management. 2) Accrual-based earnings management exploits accounting discretion over accruals like depreciation rates. Real earnings management changes actual business decisions. 3) Common patterns of earnings management include big bath restructuring, cookie jar reserves, big bets like acquisitions, and shrinking the company through share repurchases.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 10

    Lecture 13

    Earnings Management

    1
    Chapter overview:
    Overview of Earnings Management
    Types of Earnings Management
    Patterns of Earnings Management

    2
    Earnings Management
     Purposeful intervention in the external financial reporting process,
    with the intent of obtaining some private gain. (Schipper 1989)

     Earnings management occurs when managers use judgment 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 reported accounting numbers. (Healy
    and Wahlen 1999).

     The active manipulation of earnings towards a predetermined


    target. (Mulford and Comiskey 2002)
    3
    Types of Earnings management

     There are two types of Earnings


    management
     Accrual based Earnings management
     Real Earnings management

    4
    Accrual based Earnings management

     The exploitation of within-GAAP discretion over the level of


    accruals is by far the most studied EM method. Examples of
    discretionary accounting choices include accounting
    depreciation rates; deferred tax assumptions; stock (inventory)
    valuation assumptions; bad debt provisions; and revenue
    recognition.

     Accruals are the accounting adjustments that explain the


    difference between free cash flows and operating income:

     Operating Income = Free Cash Flows + Accruals.

    5
    Real Earnings management

     RM is different because, since it is now


    assumed that firms may change economic
    decisions to achieve financial targets, there
    may be real free cash flow consequences.

    6
    Patterns of Earnings Management

    Big Bath
    Cookie Jar Reserve
    Big Bet
    Shrink the ship

    7
    Big Bath

     Big bath technique based on a belief that if


    you must report bad news, it is better to
    report all at once and get away from it.
    Common circumstances are

     Operations Restructuring
     Operations Disposals

    8
    Cookie Jar Reserve

    Record more expanses in current period


    may take it possible to report less expanse
    in future period. Common areas are
    Estimating Sales return and allowances
    Estimating Bad Debts writes off.

    9
    Big Bet and Shrink the ship

    Big Bet permit companies to boost in current


    or future earnings. Common circumstance is
    Acquisition
    Shrink the ship allow companies to increase
    its earnings per share. Common
    circumstance is
    Share Repurchase

    10

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