In producing the Conceptual Framework for Financial Reporting and some of the current IFRSs, the International Accounting Standards Board (IASB) has had to address the potential problem that the management of some companies may choose to adopt inappropriate accounting policies. These could have the effect of portraying an entity’s financial position in a favorable manner. In some countries this is referred to as ‘creative accounting’.
(i) Describe in broad terms, common ways in which management can manipulate financial statements to indulge in ‘creative accounting’ and why they would wish to do so.
(ii) Explain with examples how IFRS seek to limit creative accounting in each of the following areas of accounting: Group accounting Financing non-current assets Measurement and disclosure of current assets