Some companies wish to report a steady growth in income to investors and achieve this goal through accounting practices known as earnings management. One type of earnings management is through the use of reserves for maintenance (also known as cookie jar reserves).
For example, in good years a company may increase maintenance expense by ten or twenty percent over their actual cost for the year. The company will record this by a debit to maintenance expense and a credit to a liability account created for this purpose, called deferred maintenance. In a bad year, the company will debit the deferred maintenance account and credit maintenance expense.
The rationale is that when times are good and the factory is busy, the company may get behind on maintenance. When a slowdown in production occurs, the company has time to catch up on its maintenance.
The actual practice has been observed to have much more to do with the company's ability to report a steady growth in earnings than with the rationale given above.
ASSESSMENT INSTRUCTIONS
Using the information provided in the Context for the assessment, along with other sources of information, write a 3-5-page analysis that addresses the following questions:
Do you think that the practice of earnings management through the use of deferred maintenance is ethical? Defend your answer.
Is the practice of earnings management through the use of deferred maintenance allowed in the United States? How does US GAAP differ in this treatment from International GAAP? Support your answers by the use of at least one reference.
3-5 pages, including references and title page
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