Critically discuss the nature of and incentives for earnings management. Give examples to support your answer.

/in /by

Critically discuss the nature of and incentives for earnings management. Give
examples to support your answer.

 

Question 1 (Total: 25 marks)
(a) “Corporate Social Responsibility is open and transparent business practice that is
based on ethical practice and respect for the community, employees, the
environment, shareholders. It is designed to deliver sustainable value to society at
large.” Bursa Malaysia’s CSR Framework.
Critically evaluate this definition by using Positive Accounting theory (PAT),
Legitimacy theory, Stakeholder theory and Institutional theory. (10 marks)
AND
(b) Darby Berhad has obtained a contract from the government to build a large hydro
dam. The initial agreed contract price is RM100 million. Darby Berhad estimates
that the contract costs will be RM80 million. It will take 3 years to build the dam
and construction commenced on the 1 July 2009. By 30 June 2010 the
government approved a variation order for increased revenue of RM10 million and
Darby estimated additional contract costs of RM 6 million. By 30 June 2011 an
additional variation order resulted in an increase in revenue of RM6 million with
attached costs of RM 4 million. Darby Berhad determines the stage of completion
based on costs incurred to total estimated costs. The financial information related
to the dam project is as follows:
30 June
2010
30 June
2011
30 June
2012
Revenue RM million RM million RM million
Initial revenue agreed 100 100 100
Cumulative variation – 10 16
Costs
Contract costs incurred to date 30 50 92
Contact costs to complete 52 38 –
Estimated profits 18 22 24
Required
i. Determine the percentage stage of completion of the dam project for the
years ended 30 June 2010, 2011 and 2012.
(3 marks)
ii. Prepare the statement of comprehensive income extracts for revenue,
expenses and profit for the three years above. (6 marks)
(c) Critically discuss the nature of and incentives for earnings management. Give
examples to support your answer.
(6 marks)

 

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