Creative accounting involves presenting income, expenses, assets or liability with the intent to influence readers towards the interpretations desired by the authors. It becomes the financial number game and is systematic misrepresentation of net income or net assets. this is achieved through the aggressive choice and application of accounting principles, fraudulent financial reporting , earning management or income smoothing
the facts may be twisted or the freedom given in accounting standards may be misused. ultimately, the financial statement do not reflect a true and fair view that the author desires. this involves ‘creativity’ on part of the accountant and hence it is called ‘creative accounting’
Grants in respect to capital expenditure are to be recognized within income as related assets are expensed to income. This normally happen through depreciation or sale.
On receipt of capital grant, there are two options open to an entity under IAS 20 accounting for government grants and disclosure of government assistance.
First, the grant may be credited to the asset account in respect of which the grant is received. This has the effect of lowering the carrying value of asset, with a consequential reduction of any depreciation charge. This has the effect of benefiting the profit for the accounting period in which the asset is used. This method is primarily a legacy of income statement driven approach to accounting. The conceptual framework currently in issue is financial position driven. Showing an asset at a cost net of grant would conflict with the framework.
The second allowable method is deferred income approach. Under this method a capital grant is credited to separate account on receipt. This account is held as a liability, and amortized over a period expected to benefit from the asset’s use. The asset is kept at its cost less depreciation. The net effect on the profit or loss is the same as under method one discussed before, but the balances in the statement of financial position are more likely to reflect the true asset values. As such, this method is more aligned with the philosophy of the current accounting standards.
The differed income balance should be reported as a current liability to the extent that it is expected to be recognized as income within a period of 12 months. It should be recognized as non current liability if otherwise.
If an asset in respect of which grant was received is subsequently sold, and there are no repayment implications as result of sale, any unamortised portion of the grant can be recognized immediately in income.
If there are repayment implications, provision should be made for repayment as liability or disclosed as contingent liability in accordance with the principle contained in IAS 37 provision, contingent liability and contingent asset.
Any unamortised balance in deferred income accounts should be used to provide for repayment if necessary. Once these are used up, charge should be made to profit and loss.
There are some key tell-tale indicators that should alert the accountant/auditor to the possibility that substance and form issues may exist.
Some of these are;