One of the changes introduced in IFRS 9 Financial Instruments was that realized gains on investments valued at fair value with revaluations through other comprehensive income were to be taken to retained earnings without being recycled through net income. Briefly explain how this eliminated one possible method of earnings management that previously allowed companies discretion in managing net income.
What will be an ideal response?
When realized gains on investments accounted for through other comprehensive income were cycled
through net income, companies could designate investments as accounted for through other
comprehensive income and then time the disposal of such investments to recycle the gains through net
income to increase or decrease earnings. To increase net income, investments with unrealized gains could
be sold and the gains recognized in net income. To reduce net income, investments with unrealized losses
could be sold and the losses recognized in net income. This was potentially effective because the market
places more emphasis on net income relative to other comprehensive income.
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Answer the following statement true (T) or false (F)
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