Provision Accounting and International Accounting Standards Essay

Provision Accounting and International Accounting Standards - Essay Example . It was for your convenience to figure out the definition) The trend of creating provisions under the conventional accounting practices was widely prevalent due to the fact that it allowed the companies to manipulate their earnings leading to misrepresentation of facts in the financial statements. This may relate to the "big bath" theory of accounting as defined by Healey (1985) as a method pervasively used by the companies in order to show more write offs of assets and also to project more accruals or provisions reflecting a reduction in earnings to the income statement, thus leading to the misrepresentation of the company's actual earnings. There may be several reasons behind the interest of management in the misleading reporting of the company's actual gains or losses. According to Kirschenheiter and Melumad (2002), the company's management may conceal the current years' profit or report less than actual gains with a view to report great hike in the company's profit in the future years. Abarbanell and Lehavy (2003) also confirm the same view regarding the management's discretion to conceal the company's profits. Another factor as discussed by Sikora (1999) in the case of mergers and acquisition, when new directors are appointed in the company and the management reports loss to project better management by the newly appointed directors in the future years. Healey (1985) also points out another cause for management to report less-than-actual earnings as being the expectation of change in bonus to the company's management. In this case, the company reports less than the actual increase in profit for the current year so a s to show a hike in profit the next year to earn better bonus for the management. Moore (1973) further relates the concept of "big bath" theory of accounting to the change in management factor. Beneish (2001) concludes that the chief objectives of management in managing the profit may be to create a balance and stability in the company's trend of earning profit or the company may manipulate its earnings at the time when its inflating its shares for the first time in the market in order to induce the shareholder by projecting a stabilised earnings record. All of the above-stated theories Healey (1985), Kirschenheiter and Melumad (2002), Sikora (1999), Moore (1973) and Beneish (2001) relate the use of provision accounting by the companies and their management to the theory of big bath accounting. Companies used it to affect the calculation as well as presentation and communication of the company's profits to its shareholder, investors, governmental authorities and other users of financial statements. Thus, they exploited the loopholes found in