Question

First, in developing an accounting standard, the accounting standard setters must select the ‘most appropriate’ policy from a range of alternatives for inclusion in accounting standards. The choice that they make is critical because it virtually determines accounting practice. Second, if there is no accounting standard, or if the standard either implicitly or explicitly allows a choice, the preparers of financial statements must select the most appropriate accounting policy for use in the preparation of financial statements to become creative accountants making choices about which accounting recognition, measurement and disclosure policies to use (Henderson et al, 2017 ).

AASB 108 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ deals with the choice of accounting policy. However, paragraph 7 of AASB 108 requires that, where there is a relevant Australian accounting standard, it must be applied.

Henderson et al (2017) argue that AASB 108, therefore, requires that the choice of accounting policies should result in financial statements that contain relevant and reliable information and are comparable and understandable. Relevant and reliable information is provided only when the economic substance, rather than the legal form, of a transaction is recorded and reported. (Henderson et al, 2017 p. 123).

Required:

You are required to critically examine above arguments and make your recommendations as to how accountants become creative accountants in the face of ever-increasing number of Australian accounting standards.

Report should incorporate the followings:

1. Explain Accounting policies in accordance with AASB 108 ‘Accounting Policies, Changes in Accounting Estimates and Errors.

2. How should Australian preparers of financial statements choose accounting policies when there are no applicable accounting standards?

3. Define ‘creative accounting’. What are the possible motives for such behavior? Name four general ways in which accountants can be creative.

Answer 1

1. Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.

When an Australian Accounting Standard specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item shall be determine by applying the Standard.

Australian Accounting Standards are accompanied by guidance to assist entities in applying their requirements. All such guidance states whether it is an integral part of Australian Accounting Standards. Guidance that is an integral part of the Australian Accounting Standards is mandatory. Guidance that is not an integral part of the Australian Accounting Standards does not contain requirements for financial statements.

An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless an Australian Accounting Standard specifically requires or permits categorisation of items for which different policies may be appropriate. If an Australian Accounting Standard requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category.

2.First, in developing an accounting standard, the accounting standard setters must select the ‘most appropriate’ policy from a range of alternatives for inclusion in accounting standards. The choice that they make is critical because it virtually determines accounting practice. Second, if there is no accounting standard, or if the standard either implicitly or explicitly allows a choice, the preparers of financial statements must select the most appropriate accounting policy for use in the preparation of financial statements to become creative accountants making choices about which accounting recognition, measurement and disclosure policies to use.

AASB 108 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ deals with the choice of accounting policy. However, paragraph 7 of AASB 108 requires that, where there is a relevant Australian accounting standard, it must be applied.

Second, if there is no accounting standard, or if the standard either implicitly or explicitly allows a choice, the preparers of financial statements must select the most appropriate accounting policy for use in the preparation of financial statements to become creative accountants making choices about which accounting.

3.Creative accounting refers to accounting practices that may follow the letter of the rules of standard accounting practices, but deviate from the spirit of those rules with questionable accounting ethics.

The main motives for applying creative accounting are: obtaining personal gain; competition; attracting investors; increasing or maintaining the level of capital; buying time for not settling debts; beating analysts forecasts about future company performance.

The techniques used in creative accounting relate to manipulation of off-balance sheet financing items, changes in accounting policies and depreciation methods, manipulation of other income and expense items, changes in the value of money, overestimation of revenues by recording fictitious sales revenues.