Part 3ift.world/booklets/fra-financial-reporting-quality-part3R29 Financial Reporting Quality4. Detection of Financial Reporting Quality IssuesAnalysts must be able to understand the choices that companies make in financialreporting while evaluating the overall quality of reports – both financial reportingquality and earnings quality. There is no right or wrong choice. The intent of themanagement is what makes the difference.Choices exist both in how information is presented (financial reporting quality) and inhow 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 thefollowing:Recognize revenue prematurely. Ex: a software services company recognizesrevenue before the services are delivered to a client. Revenue and earnings will beoverstated 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 inthis period should be recognized now and not put off for later. Deferringunderstates expense.Measure and report assets at higher values; and/orMeasure and report liabilities at lower values. Equity will be overstated if assetsare higher and liabilities are lower.