Yakub02
Banned
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.
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.