Impairment losses can be used to manipulate earnings by:

• A. Reporting impairment losses as revenue to increase net income.
• B. Ignoring impairment losses entirely to comply with accounting standards.
• C. Recording excessive impairment losses in one period to create future periods with artificially higher earnings (income smoothing).
• D. Delaying the recognition of impairment losses to decrease current period expenses.

Answer: (C)

Verified step by step guidance

1. Understand the concept of impairment losses: Impairment losses occur when the carrying amount of an asset exceeds its recoverable amount, and they must be recognized in financial statements to comply with accounting standards.
2. Learn about income smoothing: Income smoothing is a technique used by companies to manipulate earnings by spreading out expenses or revenues across multiple periods to make financial performance appear more consistent.
3. Analyze the manipulation method: Recording excessive impairment losses in one period artificially reduces earnings for that period. In future periods, when the impairment losses are no longer present, earnings appear higher, creating the illusion of improved financial performance.
4. Understand the accounting standards: Recognizing impairment losses accurately and timely is required by accounting standards (e.g., IFRS or GAAP). Delaying or exaggerating impairment losses violates these standards and can mislead stakeholders.
5. Evaluate ethical implications: Manipulating earnings through impairment losses undermines the reliability of financial statements and can lead to legal consequences, loss of investor trust, and reputational damage for the company.