ift.world-Part 3.pdf - Part 3 ift.world\/booklets\/fra-financial-reporting-quality-part3 R29 Financial Reporting Quality 4 Detection of Financial

ift.world-Part 3.pdf - Part 3...

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Part 3 ift.world /booklets/fra-financial-reporting-quality-part3 R29 Financial Reporting Quality 4. Detection of Financial Reporting Quality Issues Analysts must be able to understand the choices that companies make in financial reporting while evaluating the overall quality of reports – both financial reporting quality and earnings quality. There is no right or wrong choice. The intent of the management is what makes the difference. Choices exist both in how information is presented (financial reporting quality) and in how financial results are calculated (earnings quality). Choices in presentation are often transparent. Choices in the calculation of financial results are more difficult to detect. Ways to increase performance and financial position in the reporting period include the following: Recognize revenue prematurely. Ex: a software services company recognizes revenue before the services are delivered to a client. Revenue and earnings will be overstated in the current period. Use non-recurring transactions to increase profits. Ex: selling accounts receivable, which increases earnings in an unsustainable manner. Defer expense to later periods. Ex: warranty expense for a sale that happened in this period should be recognized now and not put off for later. Deferring understates expense. Measure and report assets at higher values; and/or Measure and report liabilities at lower values. Equity will be overstated if assets are higher and liabilities are lower.
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