Provision Accounting and International Accounting Standards Essay

Provision Accounting and International Accounting Standards - Essay Example. It was for your convenience to figure let 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 monetary 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, indeed leading to the misrepresentation of the companys actual earnings.There may be several reasons behind the interest of management in the misleading reporting of the companys actual gains or losses. According to Kirschenheiter and Melumad (2002), the companys management may conceal the current years meshwork or report less than actu al gains with a view to report great acclivity in the companys profit in the future years. Abarbanell and Lehavy (2003) also confirm the same view regarding the managements discretion to conceal the companys 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 companys management. In this case, the company reports less than the actual increase in profit for the current year so as 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 honcho objectives of management in man aging the profit may be to create a balance and stability in the companys 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 unhurriedness as well as presentation and communication of the companys profits to its shareholder, investors, governmental authorities and other users of financial statements. Thus, they exploited the loopholes found in