International Financial Reporting Standards

Contents

a) Commenting on the given statement        

b) Inducing Incentives        

c) Activities that might lower Earnings        

d) Evaluation of Common Accounting “Red flags”        

Bibliography        

“Conservative accounting is not good accounting; creative accounting can be more acceptable in the light of the International Financial Reporting Standards (IFRS)”.

a) Commenting on the given statement

        In order to comment on the given above statement and explain what is deemed to be good or bad for accounting in terms of usage in compliance with the International Financial Reporting Standards (IFRS), there is a need for a description of each accounting measure.

        Conservative accounting or in other terms accounting conservatism is field of accounting, which refers to thorough verification before proclaiming the legacy of any profits made by the company. This is the accounting standard which assumes all of the losses and expenses as they are revealed and incurred by a certain firm. The figures for revenue are not considered to be true until they get verified and legally accepted. The strict criterion for accepting revenue is the main form of this accounting measure. In general, most of the accounting practices are being considered to be conservative (Investopedia, 2016).        

        On the other hand, creative accounting measures that follow all the laws and regulations of GAAP (Generally Accepted Accounting Practices) but somehow diverge from the agreed standards. In exact, creative accounting uses the loopholes of the accounting principles to draw a better picture of the company’s performance. Although, the accounting measure is acceptable, still there is great concern over their usage and practice (Investopedia, 2016).         

        Based on the above, one might argue that conservative accounting is one of the generally accepted norms that are practiced as the accounting measure by most organizations. While, creative accounting is still regarded as being legal and acceptable, it is most often used for financial manipulations. Therefore, personally, I do not agree with the given statement.

b) Inducing Incentives

        The company’s management may have certain incentives that might induce them to manage earnings, financials and flow of cash (Guido Friebel & Sergei Guriev, 2005). There are following incentives, such as:

• The firm’s financial standing can be threatened by the current market figures. In other words, the executes may decide to manage the financials to improve the overall picture of the company’s financial stability or profitability ratios that could be well matched and compare with industry peers and industry market environment (Kenneth Duru, 2013);
• Sometimes, executives strive for meeting the general objectives prescribed by the third parties. In exact, they may experience a pressure to meet the requirements or other party expectations. Therefore, they well might be induced to manage the organization’s earnings;
• It is often board of the company which sets the preliminary company objectives and targets for the upcoming year. Therefore, the present situation and available quarterly information may indicate that management is quite a bit off track, inducing them to control the reported cash flows and earnings;
• Generally, initial financial benchmark is set by the board of directors and executive management, which afterwards may pressurize responsible employees to be in line with already prescribed targets and company goals. Therefore, assigned employees may strive for meeting the general goals of the management.  
• Frequently, the management may also be motivated to manage the balance sheet and financials of the company to appear more solvent and financially stable in front of creditors and other stakeholders. In other words, the earnings can be managed, in order to have enhanced performance ratios (Felix O. & Julie W., 2012).

These are the main inducing reasons why management may be inclined to manage the company’s earnings, its financial market standing and periodical flow of cash.      

c) Activities that might lower Earnings

        Sometimes firms may turn to their advantage the use of Generally Accepted Accounting Principles (GAAP) in order to achieve a desired outcome. However, these actions may entail the deterioration of the earnings quality. Generally, the low earnings are represented by the following actions: