Off Balance Sheet Financing Practices

The most important thing to any company’s stakeholders is high-quality reporting of its financial statements. Investors, for instance, need to know the truth about a company in order to make an informed decision on whether to make private investment, buy stock or bonds. However, for stakeholders to get the truth about a company, they need to read and understand management’s discussion and analysis, the president’s letter, the notes, as well as the financial statements. Conversely, financial statements must be accompanied with disclosures to prevent them from misleading the stakeholders.

Grahama, Harvey and Rajgopalc (2004) interviewed over 400 executives, revealing that executives assign a high level of priority in meeting target earnings as it builds credibility with the market and multiplies the positive effect, confirming previous research. The executives also believed failing to meet the targets would result in a severe market reaction and that directors sacrifice economic value to avoid these effects, avoiding a potentially larger economic loss. This can also be said of achieving or beating expectations, where the potential economic gain from the multiplied positive market effect can easily outweigh the economic sacrifice. Equipped with these justifications, over 80% of those surveyed admitted they were willing to sacrifice economic value and use RM to meet expectations. Moreover, the executives acknowledged that RM is more widespread and favoured to the manipulation of accounting methods,

The first topic area involves an observation of how managers and accountants currently utilize loopholes in FASB accounting standards to present better earnings results to investors, creditors, and regulatory authorities. Many business professionals support earnings management as routine practices that stay within authoritative boundaries, while other business professionals view these activities as unethical. The practitioners of earnings management misapply discretionary judgment to avoid the intent of accounting standards. In his speech The Numbers Game, on earnings manipulation, Arthur Levitt listed five, accrual-based earnings management practices: (a) “big bath” restructuring charges, (b) creative acquisition accounting, (c) “cookie jar reserves”, (d)

prevent decrease in stock value, higher borrowing cost, evade corporate bankruptcy and non-financial motives are believed to be more powerful (p.286). Stallworth and Degregorio (2004) identified that most companies managed earnings for several reason, however the most common motivations is the pressure to meet the market and analyst expectations by prematurely or fictitiously recognizing revenue (p.55). Stallworth and Degregorio suggests that the internal auditor should be cautious of the indications to perform abusive earning management or motivation to commit fraud, such as personal benefits like prestige, extra compensation, bonuses, employee stock option and increased stock value as a reward when earning expectations are met or exceeded, while negative outcomes provide the same level of motivation like reputational damage or embarrassment, loss of employment, demotion or lowered compensation (p.56).

The primary goal of a firm is to maximize profits. This implies, of course, that each decision a manager makes is consistent with that goal. Although managers are expected to rely on internally-produced reports, such as balance sheets and income statements, to help them make decisions, most of the information that appears on these statements is period-based rather than decision-based. A balance sheet shows the sum total of a firm’s assets and liabilities at a given point in time. If the firm sold off all of its assets at book value and used the proceeds to pay its liabilities, what remains is owner’s equity: the amount that is owed to shareholders. An income statement is the difference

The results from this study ought to be useful in providing managers with some guidance as to the specific information analysts believe contributes most to high quality earnings. Given that higher quality earnings are likely to be attached a higher multiple by analysts for valuation purposes, this information should be particularly important for managers wishing to maximize the market value of their company's shares.

Again each framework requires prominent presentation of a balance sheet as a primary statement but with significant differences in the format of the balance sheet itself, the current/non-current distinction, off-setting assets and liabilities, and other balance sheet classification. Let us begin with the format changes. Under IFRS, entities present current and non-current assets, and current and non-current liabilities, as separate classifications on the face of their balance sheets except when a liquidity presentation provides more relevant and reliable information. Otherwise there is no prescribed balance sheet format, and management may use judgment regarding the form of presentation in many areas. Under US GAAP; they are generally presented as total assets balancing to total liabilities and shareholders’ equity. Items presented on the face of the balance sheet are similar to IFRS but are generally presented in decreasing order of liquidity. The balance sheet detail should be sufficient to enable identification of material components. Public entities should follow specific SEC guidance. Next we have the issue of current/non-current distinction. Under IFRS; the current/non-current distinction is required. Under US GAAP; management may choose to present either a classified or non-classified balance

The role of financial reporting is to portray the economic position of a firm in a timely and credible manner. These financial statements should serve as a useful information source for different stakeholders in making economic decisions. For information to be useful it should be relevant and reliable (accounting book). Because the reported earnings could affect the decision making of stakeholders or contractual outcomes which are related to remuneration of managers or debt covenants, managers have strong incentives to adjust earnings to a desired pre-determined level (Watts, 1990) . Although established accounting standards limit the use of opportunism, the determinant is that managers have flexibility in choosing the accounting method, and the existing information asymmetry between them and external stakeholders allows them to prepare the financial reports to their own advantage. Information asymmetry is the information advantage

The balance sheet shows a very low level of inventory and PP&E (servers, computers), which concurs with the way of doing business of a software company. Furthermore, like companies like Microsoft (MSFT) it has a high percentage in other assets. Usually a sign of several patents characterizing this type of business (e.g. user interface patents, design patents, function

The introduction will provide the background about earnings management (EM) at the beginning and then talk about the objectives of our essay, followed by the logic structure of the essay.

In Bradshaw and Sloan’s (2002) article, there are several evidences show that market participants like analysts, investors and managers are stressing on the Street earnings. Street earnings is favoured by the majority because it provides additional useful and relevant information and makes the firm look better since it generates higher value. GAAP (Generally Accepted Accounting Principles) earnings is the traditional measurement based on regulations and it is not relevant in predicting future cash flows. Examples of earnings in the wild market are Street earnings and non-GAAP earnings. Following the trends of using non-GAAP earnings, it is a good way to let the free market to create an efficient corporate financial reporting even there are

Opportunity costs are commonly used in economics and do not have much relevance here, however accounting bodies and academic commentators have forwarded new methods of accounting using the current asset value, as opposed to the conventional acquisition cost.

It is important to understand the differences in how earnings and liabilities are generated or reported for different financial institutions. This paper will describe key points regarding the balance sheets of different financial institutions. Commercial Banks must mitigate interest rate and default risk, however, when a major financial crisis erupts they must have enough reserves on hand to cover their liabilities. Insurance companies use the float from the premiums paid in to invest their

The most important item in the financial statements of a company is earnings. Earnings indicate the amount of value-added activities a company has engaged in over a period of time, as well as assist in the direction of resource allocation in capital markets. Just as the eyes are the window to the soul, earnings are the window to a company’s value. Increasing earnings represent an increasing company value, while the opposite can be said about decreasing earnings. Seeing how important earnings are to a company’s value, it comes to no surprise that management has a strong incentive to report earnings in their maximum

Shareholders wealth is more credible than any other account in a business or financial statement of a business organization. Because those concerned with the business continuity like, revenue, growth on capital or survival of a company. All are dependants on the wealth of the company. If the organization maximized its profit, to higher account, simultaneously revenue (profit) will increase to maximum and risk of the company’s survival will decrease to minimum.