Yakub02
Banned
Creative accounting: Accounting practices that follow required laws and regulations, but deviate from what those standards intend to accomplish. Creative accounting: The use of aggressive and/or questionable accounting techniques in order to produce a desired accounting result.
Management may use various forms of creative accounting to manipulate the view given by the financial statements while complying with all applicable accounting standards and regulations. Creative accounting is not necessarily illegal but the practice might cross the line into fraudulent reporting.
Creative accounting techniques include the following:
Window dressing: an entity enters into a transaction just before the year end and reverses the transaction just after the year end. For example, goods are sold on the understanding that they will be returned immediately after the year end; this appears to improve profits and liquidity.
The only reason for the transaction is to artificially improve the view given by the financial statements. ‘Off balance sheet’ finance: transactions are deliberately arranged so as to enable an entity to keep significant assets and particularly liabilities out of the statement of financial position (‘off balance sheet’).
This improves gearing and return on capital employed. Examples include sale and repurchase agreements and some forms of leasing.
Changes to accounting policies or accounting estimates: for example, an entity can revalue assets (change from the cost model to the revaluation model) to improve gearing or change the way in which it depreciates assets to improve profits.
Capitalising expenses: recognising ‘assets’ which do not meet the definition in the IASB Conceptual Framework or the recognition criteria. Examples include: human resources, advertising expenditure and internally generated brand names
Management may use various forms of creative accounting to manipulate the view given by the financial statements while complying with all applicable accounting standards and regulations. Creative accounting is not necessarily illegal but the practice might cross the line into fraudulent reporting.
Creative accounting techniques include the following:
Window dressing: an entity enters into a transaction just before the year end and reverses the transaction just after the year end. For example, goods are sold on the understanding that they will be returned immediately after the year end; this appears to improve profits and liquidity.
The only reason for the transaction is to artificially improve the view given by the financial statements. ‘Off balance sheet’ finance: transactions are deliberately arranged so as to enable an entity to keep significant assets and particularly liabilities out of the statement of financial position (‘off balance sheet’).
This improves gearing and return on capital employed. Examples include sale and repurchase agreements and some forms of leasing.
Changes to accounting policies or accounting estimates: for example, an entity can revalue assets (change from the cost model to the revaluation model) to improve gearing or change the way in which it depreciates assets to improve profits.
Capitalising expenses: recognising ‘assets’ which do not meet the definition in the IASB Conceptual Framework or the recognition criteria. Examples include: human resources, advertising expenditure and internally generated brand names
