First, in developing an accounting standard, the accounting standard setters must select the ‘most appropriate’ policy from a range of alternatives for inclusion in accounting standards. The choice that they make is critical because it virtually determines accounting practice. Second, if there is no accounting standard, or if the standard either implicitly or explicitly allows a choice, the preparers of financial statements must select the most appropriate accounting policy for use in the preparation of financial statements to become creative accountants making choices about which accounting recognition, measurement and disclosure policies to use (Henderson et al, 2017 ). 

AASB 108 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ deals with the choice of accounting policy. However, paragraph 7 of AASB 108 requires that, where there is a relevant Australian accounting standard, it must be applied.

Henderson et al (2017) argue that AASB 108, therefore, requires that the choice of accounting policies should result in financial statements that contain relevant and reliable information and are comparable and understandable. Relevant and reliable information is provided only when the economic substance, rather than the legal form, of a transaction is recorded and reported. (Henderson et al, 2017 p. 123).

Required:

You are required to critically examine above arguments and make your recommendations as to how accountants become creative accountants in the face of ever-increasing number of Australian accounting standards.

Report should incorporate the followings:

1. Explain Accounting policies in accordance with AASB 108 ‘Accounting Policies, Changes in Accounting Estimates and Errors.

2. How should Australian preparers of financial statements choose accounting policies when there are no applicable accounting standards?

3. Define ‘creative accounting’. What are the possible motives for such behavior? Name four general ways in which accountants can be creative.