Impact of differences in accounting policies

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Reducing current year profit Creative accountants do not always work to increase profit. Sometimes they want to decrease the current year profit.

The reason for this is that it might allow them to increase profits in the future. For example, if an asset is written off this year but used in the future there will be no future expense to set against the future revenue. Similarly, if a liability were to be set up this year it would reduce profit.

If the liability was found to be unnecessary in the future it could be reversed back to the statement of profit or loss. Big bath accounting This refers to recognising all the bad news in one year so that later years can look stronger.



If a company expects disappointing results it might decide to make them even worse by writing down assets and recognising liabilities. In future years the assets could be used without any corresponding cost and a decision made that the liabilities are no longer required.



They would then be reversed back through the statement of profit or loss. IFRS of course has rules to prevent or limit such flagrant abuses. IAS 37:

Provisions, contingent liabilities and contingent Before the publication of IAS 37 the absence of accounting rules for provisions allowed entities to ‘manipulate’ their financial statements, especially their reported profit or loss in each year, by making provisions, increasing provisions or reducing provisions to suit management’s reporting requirements.

 

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The transaction price is the amount of consideration an entity expects to be entitled to in exchange for the goods or services promised under a contract, excluding any amounts collected on behalf of third parties (for example, sales taxes).

Definition A stand-alone selling price is the price at which an entity would sell a promised good or service separately to a customer.

Corporate Reporting 2.3 Step 3: Determine the transaction price An entity must consider the terms of the contract and its customary practices in determining the transaction price.

The transaction price assumes transfers to the customer as promised in accordance with the existing contract and that the contract will not be cancelled, renewed or modified.

The transaction price is adjusted if the entity (e.g. based on its customary business practices) has created a valid expectation that it will enforce its rights for only a portion of the contract price.

The nature, timing and amount of consideration promised by a customer affect the estimate of the transaction price.

 

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An entity must consider the effects of other factors when determining the transaction price including:

 variable consideration (including the constraining estimates of variable consideration); and

 time value of money.

: Allocate the transaction price to the performance obligations.

The objective is to allocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer.

The transaction price is allocated to each performance obligation in proportion to those stand-alone selling prices determined at the inception of the contract.