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Earnings management with intangibles: examples, misrepresent

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What are some potential areas in the recording and reporting of intangibles that might provide an unethical CEO the opportunity to present the results of operations in a more favorable light than in reality should be portrayed?

What (or whom) do you think might be in a position to prevent such misrepresentation? Explain.

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Solution Summary

Your tutorial is 465 words and explains three ways and controls that help prevent the misrepresentation.

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What are some potential areas in the recording and reporting of intangibles that might provide an unethical CEO the opportunity to present the results of operations in a more favorable light than in reality should be portrayed?

What intangibles would be unique to a specific company? Intangibles usually range from patents, copyrights, customer agreements, trademarks and goodwill (from purchasing another business at more than the fair value of assets identified). Except for goodwill, these are all amortized using straight line method over their estimated useful lives. Which intangibles a particular firm has, of course, depends on their transactions (which they buy).

Here are three ideas, ranging from the least harmful to the worst:

(1) Useful life

Intangibles are capitalized at historical cost and so that is ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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