TECHNIQUES OF EARNINGS MANAGEMENT.. ESTHER NYAMAI

. TECHNIQUES OF EARNINGS MANAGEMENT
 
Earnings management techniques  include.

i. “Cookie jar reserve” technique:
The cookie-jar technique deals with estimations of future events.  According to GAAP, management has to estimate and record obligations that will be paid in the future as a result of events or transactions in the current fiscal year based on accrual basis.
But there is always uncertainty surrounding the estimation process because future is not always certain.
There is no correct answer; there may be reasonably possible answers. 
Management has to select a single amount according to GAAP so there is a chance of taking the advantage of earnings management.  Under the cookie-jar technique, the corporation will try o overestimate expenses during the current period to manage earnings.
If and when actual expenses turn out lower than estimates, the difference can be put into the "cookie jar" to be used later when the company needs a boost in earnings to meet predictions.
examples of estimation to manage earnings  are: sales returns and allowances, estimates of bad debt and write-downs; estimating inventory write downs; estimating warranty costs; estimating pension expense; terminating pension plans and  estimating percentage of completion for long term contracts etc. 

ii. “Big Bath” Techniques:

Although a rare occurrence, sometimes corporations may restructure debt, write-down assets or change and even close down an operating segment. In these instances, expenses are generally unavoidable. If the management record estimated charge (a loss)
ainst earnings for the cost of implementing the change then it will negatively affect the cost of the share price. But the share price may go up rapidly if the charge for restructuring and related operational changes is viewed as positively. According to Big bath technique, if the manager have to report bad news i.e., a loss from substantial restructuring , it is better to report it all at once and get it out of the way. 

iii. “Big Bet on the Future” technique: 
When an acquisition occurs, the corporation acquiring the other is said to have made a big bet on the future. Under Generally Accepted Accounting Principles (GAAP) regulations, an acquisition must be reported as a purchase. This leaves two doors open for earnings management. In the first instance, a company can write off continuing R&D costs against current earnings in the acquisition year, protecting future earnings from these charges.  This means that whe he costs are actually incurred in the future, they will not have to be reported and thus future earnings will receive a boost. The second method is to claim the earnings of the recently acquired corporation. When the acquired corporation consolidated with parent company earnings, then immediately receive a boost in the current year's earnings. By acquiring another company, the parent company buys a guaranteed boost in current or future earnings through big bet technique.  

iv. “ Flushing” the investment portfolio:

To achieve strategic alliance and invest their excess funds, a company buys the shares of another company. Two forms of investment are trading securities and available for sale securities. Actual gains or losses from sales or any changes in the market value of trading securities are reported as  operating income  where as any change in market value of available for sale securities during a fiscal period is reported in “other comprehensive