Managing Earnings Through M&A

This paper discusses the use of M&A to facilitate earnings management. The accounting procedures we analyse variously create earnings which would not be reported in the absence of M&A; or reduce reported earnings; or shift earnings between accounting periods. The motivation for deploying the procedures can include changing stakeholders' 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 reorganization provision, and the recognition of intangible assets. We also discuss briefly earnings management opportunities arising in relation to M&A transaction costs, latent losses, and impairment charges. We outline the opportunities to transform earnings, give actual examples, and identify ways in which such accounting might distort economic decisions