Tension Between IFRS And Earning Management Assignment (Essay Sample)

Name:
Reg Number:
Course Code:
Date:
Explain the tensions between IFRS & Earning management
Introduction
International Financial Reporting Standards (IFRS) refers to the set of standards which states how certain transactions are supposed to be reported in financial statements. These standards are based upon principles rather than hard set rules, which is in contrast to the U.S, GAAP, and rules-based accounting standard. As a result of this difference, IFRS enables management to adopt the discretion and flexibility when compiling an organization’s financials.
On the other hand is the use is the application of accounting techniques for purposes of producing final reports that offer an overly positive view of an organization’s and financial activities and financial position. Many accounting rules and principles require company management to make judgments. Earnings management often takes advantage of how accounting rules are adopted and creates financial statements that inflate earnings, total assets as well as revenue.
Organizations adopt earning management to smooth out fluctuations in earning and present more consistent profits each month or annually. Massive fluctuations in expenses and income are a normal part of organization operations, but changes may signal the investors who prefer to get credibility and growth. American Accounting professor Howard Schlieter (2009) said Earnings Management to investors is very dangerous, because you create a man-made phenomenon. Figures should reflect the company's actual situation.
While there are many benefits of incorporation, including protecting your assets and saving money, one of the most important reasons to incorporate is for the favorable tax results. However, there exist tensions of the application of IFRS designed to improve financial reporting quality and earnings management designed to avoid corporation tax liabilities, which arose tension as a result of their implementation.
CSR is the positive steps a company adopts in the way it operates, to give benefits to the community, and ways in which it can return to the community from which it has taken to get itself established. Mr. Doug Miller (1999) conducted an experimental survey on CSR. Results indicated that consumers wanted higher social and environmental goal. CSR is currently used globally as a tool to measure and compare the firm's performances economically, socially and environmentally. This enables an organization to build a sustainable business that benefits the market and communities. It does this by capitalizing on the benefits offered to the local people like giving them employment and caring for their health especially for those who live near the company. It cares for the community and the people.
One of the tensions of IFRS is that it is prone to manipulation. An organization can only apply the methods that they like; this would lead to financial statements show only desired results, which then can result in profit manipulation. While this new set of standards needs changes to how the rules should be applied to be justifiable, it is always possible for businesses to develop with reasons for making these changes. This implies that stricter rules should be implemented to ensure all organizations will value their statements in a similar fashion.
The second tension associated with IFRS is that it is not accepted and applied internationally. The fact is that, the US has not yet fully adopted the IFRS, so as other countries that opt to continue holding out as well. This implies that accounting by foreign companies operating in these countries are experiencing challenges because they have to prepare financial statements using such a set of standards and another set of principles that is generally accepted in these countries
Another tension is that it leads to changes of tax legislation. The use of IFRS leads to a taxation of unrealized income generated by companies hence affecting their liquidity. It will not be easy to control for tax purpose since the fair value accounting is very subjective. The standards also are difficult as a result of its complexity in implementation and the high number of judgments.
Also IFRS results in uneven implementation. In situations where the local and economic factors exert pressure on the local financial reporting standards, the implementation will curtail the ability of the IFRS to information costs and risks since these ...