Definition Of Retence Management

PART A: Definition and explanation of earnings management

(i) Definition of earnings management (181 words)

Researchers have been attempting to develop the definition of earnings management yet there has been an inconsistency in the definition literature. According to Schipper (1989), earnings management is defined as “a purposeful intervention in the external financial reporting process with the intent of obtaining some private gain”. Another definition, which is more extensive is presented by Healy and Wahlen, states that “earning 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 the contractual outcomes that depend on reported accounting numbers' (Healy and Wahlen, 1998). In a basic interpretation, earnings management is a strategy employed by the management of a company to scrutinizingly manipulate the company’s earnings so that the end results match a pre-determined target. It is also “reasonable and legal management decision making and reporting intended to achieve stable and predictable financial results', said McKee, he also emphasizes the need to understand the concept in the constructive way instead of being confused with financial accounting fraudulence.

(ii) Common methods of earnings management (275 words)

There are many different methods of earning management such as accounting policy choice, the use of accruals, income smoothing, real activity management, cookie-jar technique, 'big bath' write-off. In the scope of this paper, two methods will be provided are the cookie-jar technique and big bath write-off. In terms of the first on...

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...d taxes. The 2012 loss can be explained as the serious impacts from the decision of the Australian Government in June 2011 to suspend live cattle exports to Indonesia, which leads to revaluation of the fair value of livestock and changes in its net market value down to almost ten times of the previous years’ figures.

PART C: Conclusion (79 words)

The report begins with the definition of earnings management and examines different methods suing earnings management. In the scope of this report, the importance of the concept has been pointed out together with various factors that impact on earnings management. In the second part, an example of Australian Agricultural Company is analysed based on the perspective of earnings management and accounting standards in regard to the treatment of biological assets, the commitments and cash flow position of the organization.