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Accounting analysis: accounting adjustments - Recognition of assets

3 important questions on Accounting analysis: accounting adjustments - Recognition of assets

Ambiguity over whether a company owns an asset creates a number of oppurtinities for accounting analysis:

Accounting rules and ownership on control are the result of a trade off between granting reporting discretion, which opens oppurtinities for earnings management, and imposing mechanical, rigid reporting, which opens oppurtinities for the structuring of transactions

In summary, distortions in assets are likely to arise when there is ambiguity about:

Whether the firm owns or controls a resource
when there is a high degree of uncertainty about the value of the economic benefits to be derived from the resource
when there are differences in opinion about the value of asset impairment

Oppurtinities for accounting adjustments can arise in these situations if:

Accounting rules do not do a good job of capturing the firms economics
managers use their discretion to distort the firms performance
there are legitimate differences in opinion between managers and analysts about economic uncertainties facing the firm that are reflected asset values