ABSTRACT
This chapter discusses the use of M&A to facilitate earnings management. The accounting procedures we analyse variously create earnings that would not be reported in the absence of M&A, or reschedule earnings between accounting periods. The motivation for deploying the procedures can include changing stake-holders’ perceptions of business performance and/or securing more favourable outcomes from contracts linked to earnings. Our main examples of creating or rescheduling earnings focus on three aspects of reporting the M&A transaction: the fair value adjustment, the reorganisation provision, and the recognition of intangible assets. We also discuss briefly openings for earnings management arising in relation to M&A transaction costs, latent losses, and impairment charges. We outline the scope for transforming reported earnings, give actual examples of this occurring, and identify ways in which such accounting might distort economic decisions.
